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Pollution, Factor Taxation and Unemployment

  • Koskela, Erkki
  • Schöb, Ronnie
  • Sinn, Hans-Werner

When consumers choose between clean and dirty goods and the labour market clears, a green tax reform may not bring about a double dividend in the sense of increasing environmental quality and increasing employment. However, when firms choose between clean and dirty factors of production, and when there is unemployment, such a result is very likely to occur. The paper investigates a model of a monopolistic firm where labour and energy are factors of production and trade unions negotiate the wage rate, accepting some unemployment as a result of aggressive wage demands. It is shown that, in such a framework, a green tax reform will boost employment provided it does not increase the net-of-tax wage rate by too much. This is the case when the elasticity of substitution between labour and energy is greater than one, equal to one or not too far below one.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19493.

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Date of creation: 1998
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Publication status: Published in International Tax and Public Finance 3 5(1998): pp. 379-396
Handle: RePEc:lmu:muenar:19493
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  1. Holm, Pasi & Honkapohja, Seppo & Koskela, Erkki, 1994. "A monopoly-union model of wage determination with capital and taxes: An empirical application to the Finnish manufacturing," European Economic Review, Elsevier, vol. 38(2), pages 285-303, February.
  2. Holmlund, Bertil & Kolm, Ann-Sofie, 1998. "Environmental Tax Reform in a Small Open Economy with Structural Unemployment," Working Paper Series 1997:2, Uppsala University, Department of Economics.
  3. Andrew Oswald, 1984. "Efficient Contracts are on the Labour Demand Curve: Theory and Facts," Working Papers 555, Princeton University, Department of Economics, Industrial Relations Section..
  4. Bovenberg, A.L. & Van Der Ploeg, F., 1992. "Environmental Policy, Public Finance and the Labour Market in a Second- Best World," Papers 9243, Tilburg - Center for Economic Research.
  5. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer.
  6. Schneider, Kerstin, 1997. " Involuntary Unemployment and Environmental Policy: The Double Dividend Hypothesis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(1), pages 45-49, March.
  7. Bovenberg, A. Lans & van der Ploeg, Frederick, 1996. "Optimal taxation, public goods and environmental policy with involuntary unemployment," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 59-83, October.
  8. Bovenberg, A.L., 1995. "Environmental taxation and employment," Other publications TiSEM db57f00b-741a-483d-a01b-6, School of Economics and Management.
  9. repec:ner:tilbur:urn:nbn:nl:ui:12-152985 is not listed on IDEAS
  10. repec:ner:tilbur:urn:nbn:nl:ui:12-153065 is not listed on IDEAS
  11. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  12. Bovenberg, A Lans & van der Ploeg, Frederick, 1998. " Tax Reform, Structural Unemployment and the Environment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 593-610, September.
  13. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  14. Carraro, Carlo & Galeotti, Marzio & Gallo, Massimo, 1996. "Environmental taxation and unemployment: Some evidence on the 'double dividend hypothesis' in Europe," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 141-181, October.
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