Externalities and optimal taxation

Helmuth Cremer, Firouz Gahvari, Norbert Ladoux

Research output: Contribution to journalArticlepeer-review


This paper reexamines the optimal tax design problem (income and commodities) in the presence of externalities. The nature of the second-best, and the choice of the tax instruments, are motivated by the informational structure in the economy. The main results are: (i) environmental levies (linear or nonlinear) differ in formula from Pigouvian taxes by the expressions for the optimal tax on private goods; (ii) externalities do not affect commodity tax formulas (linear and nonlinear) for private goods; (iii) externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear; and (iv) a general income tax plus strictly Pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution (at any given consumption bundle).

Original languageEnglish (US)
Pages (from-to)343-364
Number of pages22
JournalJournal of Public Economics
Issue number3
StatePublished - Dec 1 1998


  • Environmental levies
  • Externalities
  • H21
  • H23
  • Informational structure
  • Optimal taxation
  • Second-best

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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