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Optimal tax policy under heterogeneous environmental preferences

Marcelo Arbex () and Christian Trudeau ()

No 1703, Working Papers from University of Windsor, Department of Economics

Abstract: Abstract We model a federation of two heterogeneous jurisdictions where agents value consumption vs. nature differently. Consumption obtained through pollution-inducing production also generates a negative externality on neighbors. 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. Moreover, we show that optimal pollution taxes are determined only by the externality parameters, independent of agents' preferences for consumption and nature.

Keywords: Externalities; environmental preferences; optimal taxation. (search for similar items in EconPapers)
JEL-codes: D62 H23 Q53 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env, nep-pub and nep-res
Date: 2017-04, Revised 2017-04
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http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1703.pdf First version, 2017 (application/pdf)

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