Principle of targeting in environmental taxation

Research output: Contribution to journalArticlepeer-review

Abstract

This paper re-examines Sandmo’s (1975) celebrated “additive property”
and the principle of targeting in environmental taxation. It argues that, in the
absence of direct emission taxes, one cannot in general divide commodity
taxes into two mutually exclusive separate components of Pigouvian
externality-correcting and Ramsey revenue-raising. Externality-correcting
terms appear also in the expressions for the taxes on non-polluting goods–as
well as in the expressions for taxes on the polluting goods–unless
preferences are additively quasilinear either in one of the non-polluting
goods or in the labor supply. On the other hand, in the presence of direct
emission taxes, one can use emission taxes for externality correction and
leave commodity taxes for revenue raising. Nevertheless the optimal
emission tax is, in general, different from the marginal social damage of
emissions.
Original languageEnglish (US)
Pages (from-to) 223-266
JournalKorean Economic Review
Volume26
Issue number2
StatePublished - 2010

Keywords

  • second-best
  • emission taxes
  • Ramsey taxes
  • Pigouvian taxes
  • additive property
  • principle of targeting

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