Principle of Targeting in Environmental Taxation

Firouz Gahvari

Korean Economic Review, 2010, vol. 26, 223-266

Abstract: This paper re-examines Sandmo’s (1975) celebrated “additive property†and the principle of targeting in environmental taxation. It argues that, in theabsence of direct emission taxes, one cannot in general divide commodity taxes into two mutually exclusive separate components of Pigouvianexternality-correcting and Ramsey revenue-raising. Externality-correcting terms appear also in the expressions for the taxes on non-polluting goods–aswell as in the expressions for taxes on the polluting goods–unless preferences are additively quasilinear either in one of the non-pollutinggoods or in the labor supply. On the other hand, in the presence of direct emission taxes, one can use emission taxes for externality correction andleave commodity taxes for revenue raising. Nevertheless the optimal emission tax is, in general, different from the marginal social damage of emissions.

Keywords: second-best; emission taxes; Ramsey taxes; Pigouvian taxes; additive property; principle of targeting (search for similar items in EconPapers)
JEL-codes: H21 H23 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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