Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology
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Seung-Rae Kim
Abstract
Recent studies find that environmental taxes typically exacerbate pre-existing tax distortions and, therefore, the optimal pollution tax should lie below the Pigouvian level (social marginal damages). This paper analyzes a general equilibrium model with non-separable preferences and technology, relatively rare assumptions in this literature, and finds that the second-best optimal pollution tax can be above or below the first-best Pigouvian level. Surprisingly, the ordering of the two does not depend on the degree of pre-existing tax distortion. Moreover, it depends not just on the difference between the two goods' cross-price elasticities with leisure, but on that difference compared to the elasticity of demand for the polluting intermediate input. Finally, the paper shows that under plausible parameter conditions, a greater pre-existing tax distortion can increase the optimal level of environmental regulation.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Frontiers of Economic Analysis & Policy
- Second-Best Pollution Taxation and Environmental Quality
- Advances in Economic Analysis & Policy
- Home Bias in Portfolios and Taxation of Asset Income
- Explaining Incomplete Contracts as the Result of Contract-Reading Costs
- Lobbying and Legislative Bargaining
- Contributions to Economic Analysis & Policy
- Why Governments Should Tax Mobile Capital in the Presence of Unemployment
- Testing the Economic Model of Crime:The National Hockey League's Two-Referee Experiment
- Road Warrior Booty: Prize Structures in Motorcycle Racing
- Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology
- Adverse Selection, Short-Term Contracting, and the Underprovision of On-the-Job Training
- Credits, Crises, and Capital Controls: A Microeconomic Analysis
- The Effects of Social Security Privatization on Household Saving: Evidence from Chile
- Complexity, Bounded Rationality and Heuristic Search
- Patent Theory versus Patent Law
- An Assessment of the Proposals of the President's Commission to Strengthen Social Security
- Collusive Bidding in the FCC Spectrum Auctions
- Topics in Economic Analysis & Policy
- Pension systems in integrated capital markets
- Trade Tax Reform in a Small Open Economy with Distributional Objectives and Distortionary Taxation
