Environmental Levies, Distortionary Taxation and Increasing Returns

Wenli Cheng, Dingsheng Zhang and Cema Cema

No 10-14, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: In this note, we introduce increasing returns to Bovenberg and Mooij's (1994) model as generalised in Fullerton (1997) and use an example to show that (1) even with a distortionary labor tax, the optimal environmental levy is greater than the Pigouvian rate; (2) the difference between tax on the "dirty" good and the "clean" good is also greater than the Pigouvian tax; (3) under certain circumstances, the government can optimally use the environmental levy to both meet its revenue requirement and subsidize the "clean" goods with increasing returns.

Keywords: environmental levies; distortionary taxation; increasing returns (search for similar items in EconPapers)
JEL-codes: H23 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2014-04
New Economics Papers: this item is included in nep-acc, nep-env, nep-pbe, nep-pub and nep-res
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