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Optimal tax policy under heterogeneous environmental preferences

Author

Listed:
  • Marcelo Arbex

    () (Department of Economics, University of Windsor)

  • Christian Trudeau

    () (Department of Economics, University of Windsor)

Abstract

Abstract We model a federation of two heterogeneous jurisdictions where agents value consumption vs. nature differently. Consumption obtained through pollution-inducing production also generates a negative externality on neighbors. 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. Moreover, we show that optimal pollution taxes are determined only by the externality parameters, independent of agents' preferences for consumption and nature.

Suggested Citation

  • Marcelo Arbex & Christian Trudeau, 2017. "Optimal tax policy under heterogeneous environmental preferences," Working Papers 1703, University of Windsor, Department of Economics, revised Apr 2017.
  • Handle: RePEc:wis:wpaper:1703
    as

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    File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1703.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    6. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, Fall.
    7. Sandmo, Agnar, 2011. "Atmospheric externalities and environmental taxation," Energy Economics, Elsevier, vol. 33(S1), pages 4-12.
    8. Boadway, Robin & Song, Zhen & Tremblay, Jean-Fran├žois, 2013. "Non-cooperative pollution control in an inter-jurisdictional setting," Regional Science and Urban Economics, Elsevier, vol. 43(5), pages 783-796.
    9. 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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    More about this item

    Keywords

    Externalities; environmental preferences; optimal taxation.;

    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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