Optimal Fiscal Policy and the Environment

Jenny Ligthart

No 1998/146, IMF Working Papers from International Monetary Fund

Abstract: The paper studies the setting of optimal fiscal policy in a second-best world with environmental externalities. The optimal second-best pollution tax is shown to lie below the first-best Pigovian tax, particularly if substitution between labor and polluting intermediate inputs is easy, the labor supply curve is more elastic, and preexisting taxes are large. The optimal level of public abatement is derived from the modified Samuelson rule and is larger if society cares more for the environment, public funds are inexpensive, and public abatement is relatively productive. The analysis also shows that the Samuelson rule should be revised if allowance is made for nonseparabilities in preferences.

Keywords: WP; public spending; public goods; public funds; abatement; marginal cost of public funds; pollution taxation; Samuelson rule; second-best; public consumption; labor-environment elasticity; abatement activity; marginal utility; consumption goods; makes household; pollution externality raise; Private consumption; Labor taxes; Environmental taxes; Labor supply (search for similar items in EconPapers)
Pages: 28
Date: 1998-09-01
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Citations: View citations in EconPapers (1)

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