Optimal Control of Externalities in the Presence of Income Taxation
Louis Kaplow
STICERD - Public Economics Programme Discussion Papers from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE
Abstract:
A substantial literature examines second-best environmental policy, focusing particularly on how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation. Additional literature is motivated by the possibility that distributive concerns should amend the internalization prescription. It is demonstrated, however, that simple first-best rules - unmodified for labor supply distortion or distribution - are correct in a natural, basic formulation of the problem. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement. Likewise, a marginal reform in the direction of the first-best can yield a Pareto improvement. Qualifications and explanations for differences from previous work are also presented.
Keywords: Allocative Efficiency; Externalities; Equity; Justice; Inequality; labor supply (search for similar items in EconPapers)
JEL-codes: D61 D62 D63 H21 H23 K32 (search for similar items in EconPapers)
Date: 2010-05
New Economics Papers: this item is included in nep-env and nep-res
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stippp:02
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