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Heterogeneous preferences, atmospheric externalities, and environmental taxation

Author

Listed:
  • Marcelo Arbex

    (Department of Economics, University of Windsor)

  • Christian Trudeau

    (Department of Economics, University of Windsor)

Abstract

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.

Suggested Citation

  • Marcelo Arbex & Christian Trudeau, 2015. "Heterogeneous preferences, atmospheric externalities, and environmental taxation," Working Papers 1503, University of Windsor, Department of Economics, revised Jun 2016.
  • Handle: RePEc:wis:wpaper:1503
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    References listed on IDEAS

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    More about this item

    Keywords

    Externalities; environmental preferences; optimal taxation.;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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