On Environmental Taxation under Uncertain Environmental Damage

Thomas Aronsson () and Sören Blomquist

Environmental & Resource Economics, 2003, vol. 24, issue 2, 183-196

Abstract: This paper addresses optimal taxation, when therelationship between the consumption of a`dirty' good and the resulting environmentaldamage is uncertain and treated as a randomvariable by policy makers. The main purpose isto analyze how increased uncertainty, measuredas a mean preserving increase in the spread ofthis random variable, affects the optimalcommodity tax on the dirty consumption good. Incase the only task of government is to correctthe environmental externality, and if thepreferences are characterized by nondecreasingabsolute risk aversion, we find that thecommodity tax on the dirty consumption goodincreases in response to additionaluncertainty. If, on the other hand, thegovernment provides a public good and uses alump-sum tax in addition to the commodity tax,it is possible that the commodity tax decreasesas a response to additional uncertainty, evenif the preferences are characterized bynondecreasing absolute risk aversion. A similarresult emerges, although for different reasons,if the lump-sum tax is replaced by a laborincome tax. Copyright Kluwer Academic Publishers 2003

Keywords: green taxes; optimal taxation; uncertainty (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (1)

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DOI: 10.1023/A:1022833723175

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