A BEJEAP Contributions article.

Abstract

Recent studies find that environmental taxes typically exacerbate pre-existing tax distortions and, therefore, the optimal pollution tax should lie below the Pigouvian level (social marginal damages). This paper analyzes a general equilibrium model with non-separable preferences and technology, relatively rare assumptions in this literature, and finds that the second-best optimal pollution tax can be above or below the first-best Pigouvian level. Surprisingly, the ordering of the two does not depend on the degree of pre-existing tax distortion. Moreover, it depends not just on the difference between the two goods' cross-price elasticities with leisure, but on that difference compared to the elasticity of demand for the polluting intermediate input. Finally, the paper shows that under plausible parameter conditions, a greater pre-existing tax distortion can increase the optimal level of environmental regulation.

Submitted: December 2, 2001 · Accepted: June 24, 2002 · Published: July 9, 2002

Originally published in Contributions to Economic Analysis & Policy.

Recommended Citation

Kim, Seung-Rae (2002) "Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology," Contributions to Economic Analysis & Policy: Vol. 1 : Iss. 1, Article 4.
Available at: http://www.bepress.com/bejeap/contributions/vol1/iss1/art4