A classroom game on a negative externality correcting tax: Revenue return, regressivity, and the double dividend

Joshua Duke and David M. Sassoon

The Journal of Economic Education, 2017, vol. 48, issue 2, 65-73

Abstract: The concept of negative externality is central to the teaching of environmental economics, but corrective taxes are almost always regressive. How exactly might governments return externality-correcting tax revenue to overcome regressivity and not alter marginal incentives? In addition, there is a desire to achieve a double dividend in the use of externality-correcting taxes, that is, to use the revenue to offset existing distortionary taxes, such as those on labor that produce a dead weight loss. In this article, the authors explain a classroom game that was developed for students to understand the theory of externalities, taxation dead weight loss, and regressivity. Then, the problem helps students explore the actual design of a policy that satisfies the double dividend hypothesis and corrects for regressivity.

Date: 2017
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DOI: 10.1080/00220485.2017.1285736

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