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A Fuel Tax Decomposition When Local Pollution Matters

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  • Stéphane Gauthier

    () (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Fanny Henriet

    () (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

Abstract

We study the optimal design of consumption taxes when both global and local externalities matter. Local externalities make the social impact of the consumption of externality-generating commodities varying across consumers. A typical example involves the greater damage caused by pollution from urban fuel consumers. We provide a condition for the validity of the targeting principle according to which externality concerns should only fall on the taxes on externality-generating commodities. When this condition is satisfied, one can decompose the tax on an externality-generating commodity into equity/efficiency and Pigovian contributions. The Pigovian contribution should exceed the average social damage if the fuel consumption of the greatest polluters is more responsive to fuel price. In an empirical illustration we find that the fuel tax in France is mostly explained by Pigovian considerations.

Suggested Citation

  • Stéphane Gauthier & Fanny Henriet, 2018. "A Fuel Tax Decomposition When Local Pollution Matters," PSE Working Papers halshs-01826330, HAL.
  • Handle: RePEc:hal:psewpa:halshs-01826330
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01826330
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    Keywords

    Pigovian tax; targeting principle; local externality; pollution; commodity taxes;

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