Free-Riding on Environmental Taxation

Maria Chistyakova and Philippe Mahenc

No CE3S-02/15, CEEES Paper Series from European University at St. Petersburg, Department of Economics

Abstract: We examine how tax avoidance affects the optimal design of a linear tax on polluting emissions in a monopoly setting. The firm is owned by shareholder who differ in their cost of tax dodging. Following Buchanan (1969), the optimal tax should correct for two negative externalities due to pollution and the monopolist's behavior. The analysis highlights two conflicting effects of tax avoidance on the environmental policy design: a free-riding effect and a tax base erosion effect. With heterogeneous tax avoidance, the regulator must also internalize the externality imposed by the free-riding of tax avoiders on the rest of the society. This free-riding makes the regulator either impotent or unfair, depending on the severity of the environmental damage and the firms' efficiency. We also show that a two-part tax schedule can achieve the first-best outcome.

Keywords: environmental taxation; monopoly; tax avoidance (search for similar items in EconPapers)
JEL-codes: D43 D82 H23 L12 Q28 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-11-19
New Economics Papers: this item is included in nep-ene, nep-env and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:eus:ce3swp:0215

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