Pollution Taxes in a Second-Best World
It is a pleasure to address this group today. I have decided to spend my time discussing recent issues involved in setting environmental taxes in a second-best world. This is an area that has seen an explosion of research and new insights over the past decade and also an area with which many EU countries (as well as candidate EU countries) have been grappling. The basic message of my talk (if there is one) is that the policy prescriptions that most of us learned when studying environmental policy in isolation (that is, in partial equilibrium) often must be significantly adapted once one moves to a general equilibrium framework with pre-existing distortions. Put this way, there is nothing novel here; it is simply a restatement of the Theorem of the Second Best (Lipsey and Lancaster (1956-1957)). This, however, risks trivializing the literature of the past decade. As a contributor to that literature, I'd prefer not to do that. More to the point, there are some very interesting results that bear discussion.
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