IDEAS home Printed from
   My bibliography  Save this paper

Direct vs Indirect Taxation of Externalities : A General Treatment


  • Lockwood, Ben


It is well known that it may be possible to attain a Pareto-efficient allocation in an economy with consumption externalities by the imposition of suitable excise taxes and subsidies, although the imposition of such taxes may not be sufficient. In addition, the structure of these Pigovian excise taxes is familiar ; they are levied only on the externally-causing goods, and in general will differ across individuals. In practice, however, it is usually prohibitively costly to attempt to distinguish perfectly between individual externality creators, whereas it is often feasible to impose ordinary commodity taxes on externality-creating goods as a 'second-best' corrective measure. An example that is often cited is the case of pollution from the internal combustion engine ; it is infeasible to monitor the pollution emission of each separate car owner and tax him accordingly, but it is quite possible to tax petrol at a rate which is uniform across consumers. This fact has an important economic implication, which is that if corrective excise taxes are constrained to be uniform across individuals, 'first-best' allocations are usually not attainable, and therefore the choice of optimal tax structure is then a 'second-best' problem, even if lump-sum redistribution is possible.

Suggested Citation

  • Lockwood, Ben, 1980. "Direct vs Indirect Taxation of Externalities : A General Treatment," The Warwick Economics Research Paper Series (TWERPS) 175, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:175

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wrk:warwec:175. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Margaret Nash). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.