Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns

Wenli Cheng and Dingsheng Zhang

Annals of Economics and Finance, 2021, vol. 22, issue 2, 525-540

Abstract: This paper develops a set of three models to study the optimal tax-subsidy regime in an economy characterised by two deviations from the perfect competition model -- negative externality from pollution by the "dirty" industry, and increasing returns in the "clean" industry. Its main conclusions are: (1) the optimal single pollution tax is higher than the Pigouvian level; (2) a combination of pollution tax and quantity subsidy increases consumer welfare at a lower level of pollution tax; (3) the optimal pollution tax can be further lowered and consumer welfare further increased if the quantity subsidy is supplemented by a lump-sum subsidy.

Keywords: Optimal pollution tax; Clean subsidy; Increasing returns; Monopolistic competition (search for similar items in EconPapers)
JEL-codes: H23 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2021:v:22:i:2:chengzhang

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