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Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns

Author

Listed:
  • Wenli Cheng

    (Department of Economics, Monash University)

  • Dingsheng Zhang

    (EMS and IAS, Wuhan University and CEMA, Central University of Finance and Economics)

Abstract

This paper develops a set of three models to study the optimal tax-subsidy regime in an economy characterised by two deviations from the perfect competition model -- negative externality from pollution by the "dirty" industry, and increasing returns in the "clean" industry. Its main conclusions are: (1) the optimal single pollution tax is higher than the Pigouvian level; (2) a combination of pollution tax and quantity subsidy increases consumer welfare at a lower level of pollution tax; (3) the optimal pollution tax can be further lowered and consumer welfare further increased if the quantity subsidy is supplemented by a lump-sum subsidy.

Suggested Citation

  • Wenli Cheng & Dingsheng Zhang, 2021. "Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns," Annals of Economics and Finance, Society for AEF, vol. 22(2), pages 525-540, November.
    • Handle: RePEc:cuf:journl:y:2021:v:22:i:2:chengzhang
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal pollution tax; Clean subsidy; Increasing returns; Monopolistic competition;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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