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Heterogeneous preferences, atmospheric externalities, and environmental taxation

Listed author(s):
  • Marcelo Arbex

    ()

    (Department of Economics, University of Windsor)

  • Christian Trudeau

    ()

    (Department of Economics, University of Windsor)

We model a federation of two jurisdictions where agents value consumption vs. nature differently. Consumption obtained through pollution-inducing production also generate a negative externality on neighbors. When regions are heterogeneous, we show that even with a decentralized policy we can obtain first-best efficiency by choosing a combination of pollution taxes in both regions and lump-sum transfers. We show that optimal pollution taxes are determined only by the externality parameters. For Cobb-Douglas preferences, the optimal transfer also depend on the initial stocks of nature, but not on preference parameters. Numerically we explore further the relationship among preferences for consumption versus nature, pollution externality and government policies.

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File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1503.pdf
File Function: First version, 2015
Download Restriction: no

Paper provided by University of Windsor, Department of Economics in its series Working Papers with number 1503.

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Length: 23 pages
Date of creation: Jun 2015
Date of revision: Jun 2016
Handle: RePEc:wis:wpaper:1503
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  1. Marcus Berliant & Shin-Kun Peng & Ping Wang, 2014. "Taxing pollution: agglomeration and welfare consequences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 55(3), pages 665-704, April.
  2. Fell, Harrison & Kaffine, Daniel T., 2014. "Can decentralized planning really achieve first-best in the presence of environmental spillovers?," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 46-53.
  3. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  4. Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-1217, September.
  5. Douglas Lundin, 2001. "Welfare-Improving Carbon Dioxide Tax Reform Taking Externality and Location into Account," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(5), pages 815-835, November.
  6. Julien Daubanes & André Grimaud, 2010. "Taxation of a Polluting Non-renewable Resource in the Heterogeneous World," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(4), pages 567-588, December.
  7. Thomas H. Tietenberg, 1980. "Transferable Discharge Permits and the Control of Stationary Source Air Pollution: A Survey and Synthesis," Land Economics, University of Wisconsin Press, vol. 56(4), pages 391-416.
  8. Silva, Emilson C. D. & Caplan, Arthur J., 1997. "Transboundary Pollution Control in Federal Systems," Journal of Environmental Economics and Management, Elsevier, vol. 34(2), pages 173-186, October.
  9. Williams, Roberton III, 2002. "Environmental Tax Interactions when Pollution Affects Health or Productivity," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 261-270, September.
  10. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, September.
  11. Benjamin Jones & Michael Keen & Jon Strand, 2013. "Fiscal implications of climate change," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(1), pages 29-70, February.
  12. Jesse Schwartz & Robert Repetto, 2000. "Nonseparable Utility and the Double Dividend Debate: Reconsidering the Tax-Interaction Effect," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 15(2), pages 149-157, February.
  13. Williams III, Roberton C., 2003. "Health effects and optimal environmental taxes," Journal of Public Economics, Elsevier, vol. 87(2), pages 323-335, February.
  14. Boadway, Robin & Song, Zhen & Tremblay, Jean-François, 2013. "Non-cooperative pollution control in an inter-jurisdictional setting," Regional Science and Urban Economics, Elsevier, vol. 43(5), pages 783-796.
  15. Katrin Millock & Céline Nauges, 2006. "Ex Post Evaluation of an Earmarked Tax on Air Pollution," Land Economics, University of Wisconsin Press, vol. 82(1), pages 68-84.
  16. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
  17. Nicholas Z. Muller & Robert Mendelsohn, 2009. "Efficient Pollution Regulation: Getting the Prices Right," American Economic Review, American Economic Association, vol. 99(5), pages 1714-1739, December.
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