Optimal Tax Policy with Environmental Externalities and Heterogeneous Preferences

Sanna Tenhunen
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Sanna Tenhunen: School of Management, University of Tampere

No 541, Working Papers from Tampere University, Faculty of Management and Business, Economics

Abstract: This study considers simultaneously two important aspects of taxation, environmental policy and redistribution. Tax policy is constrained by the a symmetric information of agents’ productivities and preferences. Two-dimensional heterogeneity affects the optimality of commodity taxation: it can be used to redistributional or environmental purposes, but there seems to be a trade-off between these objectives. However, the contradiction between the two aspects is not as clear as in the case with identical consumer preferences. It is also shown that the Sandmo-Dixit result of these parability of environmental taxes fails with two-dimensional heterogeneity in the pool ingoptimum, but not in these parating optimum. The explanation to this is that there are too few policy instruments in the pooling equilibrium: commodity taxes should take care of both redistribution and externality internalisation.

Keywords: heterogeneous preferences; externalities; commodity taxation (search for similar items in EconPapers)
JEL-codes: H21 H23 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2005-05
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http://urn.fi/urn:isbn:951-44-6332-3 First version, 2005 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:tam:wpaper:0541

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