Heterogeneous preferences, atmospheric externalities, and environmental taxation

Marcelo Arbex and Christian Trudeau

No 1503, Working Papers from University of Windsor, Department of Economics

Abstract: We model a federation of two jurisdictions where agents value consumption vs. nature differently. Consumption obtained through pollution-inducing production also generate a negative externality on neighbors. When regions are heterogeneous, we show that even with a decentralized policy we can obtain first-best efficiency by choosing a combination of pollution taxes in both regions and lump-sum transfers. We show that optimal pollution taxes are determined only by the externality parameters. For Cobb-Douglas preferences, the optimal transfer also depend on the initial stocks of nature, but not on preference parameters. Numerically we explore further the relationship among preferences for consumption versus nature, pollution externality and government policies.

Keywords: Externalities; environmental preferences; optimal taxation. (search for similar items in EconPapers)
JEL-codes: D62 H23 Q53 Q58 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2015-06, Revised 2016-06
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
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Persistent link: https://EconPapers.repec.org/RePEc:wis:wpaper:1503

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