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Optimal tax policy under heterogeneous environmental preferences

Listed author(s):
  • Marcelo Arbex

    ()

    (Department of Economics, University of Windsor)

  • Christian Trudeau

    ()

    (Department of Economics, University of Windsor)

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.

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File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1703.pdf
File Function: First version, 2017
Download Restriction: no

Paper provided by University of Windsor, Department of Economics in its series Working Papers with number 1703.

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Length: 12 pages
Date of creation: Apr 2017
Date of revision: Apr 2017
Handle: RePEc:wis:wpaper:1703
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  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. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  3. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
  4. 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.
  5. 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.
  6. 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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