Trade costs and the choice of international commodity tax base revisited: The role of transboundary pollution

Tsaur‐Chin Wu

International Journal of Economic Theory, 2019, vol. 15, issue 4, 361-383

Abstract: It is generally believed that when trade costs fall, the origin‐based production taxes are superior to the destination‐based consumption taxes under imperfect competition. This result can be justified from a perspective of purely local pollution when considering a production‐type externality. However, we show that with smaller trade costs, the destination‐based consumption taxes tend to generate greater welfare levels than the origin‐based production taxes when the degree of a production‐type transboundary externality is high enough, contrary to general belief.

Date: 2019
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