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Environmental Levies, Distortionary Taxation and Increasing Returns


  • Wenli Cheng
  • Dingsheng Zhang
  • CEMA


In this note, we introduce increasing returns to Bovenberg and Mooij's (1994) model as generalised in Fullerton (1997) and use an example to show that (1) even with a distortionary labor tax, the optimal environmental levy is greater than the Pigouvian rate; (2) the difference between tax on the "dirty" good and the "clean" good is also greater than the Pigouvian tax; (3) under certain circumstances, the government can optimally use the environmental levy to both meet its revenue requirement and subsidize the "clean" goods with increasing returns.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang & CEMA, 2014. "Environmental Levies, Distortionary Taxation and Increasing Returns," Monash Economics Working Papers 10-14, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2014-10

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    environmental levies; distortionary taxation; increasing returns;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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