Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns

Wenli Cheng, Dingsheng Zhang and Cema Cema

No 11-14, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper develops a set of three models to study the optimal tax-subsidy regime in an economy characterised by two deviations from the perfect competition model – negative externality from pollution by the "dirty" industry, and increasing returns in the "clean" industry. Its main conclusions are: (1) the optimal single pollution tax is higher than the Pigouvian level; (2) a combination of pollution tax and quantity subsidy increases consumer welfare at a lower level of pollution tax; (3) the optimal pollution tax can be further lowered and consumer welfare further increased if the quantity subsidy is supplemented by a lump-sum subsidy.

Keywords: optimal pollution tax; clean subsidy; increasing returns; monopolistic competition (search for similar items in EconPapers)
JEL-codes: H23 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2014-04
New Economics Papers: this item is included in nep-acc, nep-ene, nep-env, nep-pbe, nep-pub and nep-res
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Journal Article: Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns (2021)
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