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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

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
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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.
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    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. 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.
    5. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
    6. Sandmo, Agnar, 2011. "Atmospheric externalities and environmental taxation," Energy Economics, Elsevier, vol. 33(S1), pages 4-12.
    7. 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.
    8. 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.
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    Full references (including those not matched with items 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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