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Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns

Author

Listed:
  • Wenli Cheng
  • Dingsheng Zhang
  • CEMA

Abstract

This paper develops a set of three models to study the optimal tax-subsidy regime in an economy characterised by two deviations from the perfect competition model – negative externality from pollution by the "dirty" industry, and increasing returns in the "clean" industry. Its main conclusions are: (1) the optimal single pollution tax is higher than the Pigouvian level; (2) a combination of pollution tax and quantity subsidy increases consumer welfare at a lower level of pollution tax; (3) the optimal pollution tax can be further lowered and consumer welfare further increased if the quantity subsidy is supplemented by a lump-sum subsidy.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang & CEMA, 2014. "Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns," Monash Economics Working Papers 11-14, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2014-11
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    File URL: http://www.buseco.monash.edu.au/eco/research/papers/2014/1114optimalchengzhangcema.pdf
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    More about this item

    Keywords

    optimal pollution tax; clean subsidy; increasing returns; monopolistic competition;

    JEL classification:

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

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