Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology

Seung-Rae Kim ()

The B.E. Journal of Economic Analysis & Policy, 2002, vol. 1, issue 1, 27

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.

Keywords: Optimal environmental regulation; Pre-existing tax distortions; Non-separable preferences and technology; Emissions taxes; Emissions quota (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (11)

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DOI: 10.2202/1538-0645.1025

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