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The Effect of Addiction on Environmental Taxation in a First and Second-best world

  • Löfgren, Åsa

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

We examine the effect of addictive behavior on a socially optimal environmental tax. If utility in part depends on past consumption and individuals are time-consistent, the socially optimal environmental tax is shown to be equal to the conventional Pigovian tax. In a second-best world where the social planner has a restriction on the future environmental tax level, the current optimal tax is no longer equal to the Pigovian tax. We extend the analysis with time-inconsistent (myopic) individuals to both the first (no restriction on future environmental tax) and second-best world (restriction on future environmental tax). Also, the importance of addiction in an environmental framework is discussed.

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File URL: http://hdl.handle.net/2077/2825
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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 91.

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Length: 26 pages
Date of creation: 12 Mar 2003
Date of revision:
Handle: RePEc:hhs:gunwpe:0091
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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