"More is Less": The Tax Effects of Ignoring Flow Externalities
Leif Sandal (),
Stein Ivar Steinshamn and
R. Quentin Grafton ()
Economics and Environment Network Working Papers from Australian National University, Economics and Environment Network
Using a model of nonlinear decay of the stock pollutant, and starting from the same initial conditions, the paper shows that an optimal tax that corrects for both stock and flow externalities may result in a lower tax, fewer cumulative emissions (less decay) and higher output at the steady state than a corrective tax that ignores the flow externality. The "more is less" result emphasises that setting a corrective tax that ignores the flow externality, or imposing a corrective tax at too low a level where there exists only a stock externality, may affect both transitory and steady state output, tax payments and cumulative emissions. The result has important policy implications for decision makers setting optimal corrective taxes and targeted emission limits whenever stock externalities exist.
Keywords: taxes; stock and flow externalities; nonlinear decay; climate change (search for similar items in EconPapers)
JEL-codes: H21 Q25 (search for similar items in EconPapers)
Pages: 18 pages
New Economics Papers: this item is included in nep-ene
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Journal Article: "More is less": the tax effects of ignoring flow externalities (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:anu:eenwps:0103
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