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Optimal Taxation with Migration and Regional Externalities

Author

Listed:
  • Eren Gürer

Abstract

This paper studies optimal taxation when marginal contributions to an externality differ between urban and rural regions (non-atmospheric externalities), and individuals can migrate from rural to urban regions to earn higher wages. I show that when the government is constrained to set a uniform commodity tax across regions, the presence of externalities alters the structure of optimal redistribution. In particular, if, for example, urban residents impose higher marginal external damages, the optimal policy features more redistribution, relative to a benchmark without externalities. This additional redistribution reduces the attractiveness of higher urban wages and thus discourages migration into the urban region. These findings highlight a potential role for redistributive policy in internalizing externalities.

Suggested Citation

  • Eren Gürer, 2026. "Optimal Taxation with Migration and Regional Externalities," CESifo Working Paper Series 12987, CESifo.
    • Handle: RePEc:ces:ceswps:_12987
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    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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