Lief K. Sandal (Norwegian School of Economics and Business Administration) Stein Ivar Steinshamn (Foundation for Research in Economics and Business Administration) R. Quentin Grafton () (Australian National University, Asia Pacific School of Economics and Government)
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Using a model of nonlinear decay of the stock pollutant, and starting from the same initial conditions, the paper shows that an optimal tax that corrects for both stock and flow externalities may result in a lower tax, fewer cumulative emissions (less decay) and higher output at the steady state than a corrective tax that ignores the flow externality. The "more is less" result emphasises that setting a corrective tax that ignores the flow externality, or imposing a corrective tax at too low a level where there exists only a stock externality, may affect both transitory and steady state output, tax payments and cumulative emissions. The result has important policy implications for decision makers setting optimal corrective taxes and targeted emission limits whenever stock externalities exist.
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