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Pigouvian Taxation in a Ramsey World

Author

Listed:
  • Robin Boadway

    () (Queen's University)

  • Jean-Francois Trembley

    (University of Ottawa)

Abstract

This paper studies the optimal Pigouvian tax for correcting pollution when the government also uses distortionary taxes to raise revenues. When preferences are quasilinear in leisure and additive, the Pigovian tax can be separated from the Ramsey revenue-raising tax. We characterize the relationship between the Pigouvian tax and marginal social damages in a variety of circumstances. In a setting with homogeneous households, the Pigouvian tax exceeds marginal damages if goods have inelastic demands, and vice versa. When households are heterogeneous so taxes can be redistributive, the Pigouvian tax gives more weight to damages suffered by low-income persons. The analysis is extended to allow for costly abatement. In general corrective taxes have to be applied to both emissions and output of the polluting good.

Suggested Citation

  • Robin Boadway & Jean-Francois Trembley, 2008. "Pigouvian Taxation in a Ramsey World," Working Papers 1167, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1167
    as

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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1167.pdf
    File Function: First version 2008
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    References listed on IDEAS

    as
    1. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-1089, September.
    2. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
    3. Helmuth Cremer & Firouz Gahvari & Norbert Ladoux, 2001. "Second-Best Pollution Taxes and the Structure of Preferences," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 258-280, October.
    4. Auerbach, Alan J. & Hines, James Jr., 2002. "Taxation and economic efficiency," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 21, pages 1347-1421 Elsevier.
    5. Nava, Mario & Schroyen, Fred & Marchand, Maurice, 1996. "Optimal fiscal and public expenditure policy in a two-class economy," Journal of Public Economics, Elsevier, vol. 61(1), pages 119-137, July.
    6. Cremer, Helmuth & Gahvari, Firouz, 2001. "Second-best taxation of emissions and polluting goods," Journal of Public Economics, Elsevier, vol. 80(2), pages 169-197, May.
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    Cited by:

    1. Bas (B.) Jacobs & Rick (F.) van der Ploeg, 2017. "Should Pollution Taxes Be Targeted At Income Redistribution?," Tinbergen Institute Discussion Papers 17-070/VI, Tinbergen Institute.
    2. Firouz Gahvari, 2010. "Principle of Targeting in Environmental Taxation," Korean Economic Review, Korean Economic Association, vol. 26, pages 223-266.
    3. William Jaeger, 2011. "The Welfare Effects of Environmental Taxation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(1), pages 101-119, May.

    More about this item

    Keywords

    Pigouvian tax; optimal taxes; pollution tax;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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