Optimal taxation of externalities interacting through markets: A theoretical general equilibrium analysis

Xiaolin Ren, Don Fullerton, John B. Braden

Research output: Contribution to journalArticlepeer-review

Abstract

This study develops a theoretical general equilibrium model to examine optimal externality tax policy in the presence of externalities linked to one another through markets rather than technical production relationships. Analytical results reveal that the second-best externality tax rate may be greater or less than the first-best rate, depending largely on the elasticity of substitution between the two externality-generating products. These results are explored empirically for the case of greenhouse gas and nitrogen emissions associated with biofuels and petroleum.

Original languageEnglish (US)
Pages (from-to)496-514
Number of pages19
JournalResource and Energy Economics
Volume33
Issue number3
DOIs
StatePublished - Sep 2011

Keywords

  • Biofuel
  • GHG emissions
  • Multiple externalities
  • Nitrogen leaching
  • Second-best tax

ASJC Scopus subject areas

  • Economics and Econometrics

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