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Second-best pollution taxes

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  • Fuest, Clemens
  • Huber, Bernd

Abstract

This paper compares the second-best optimal tax on polluting consumption goods with the Pigovian tax, which would internalize marginal environmental damage at a second-best optimum. It is shown that the relationship between the optimal tax on polluting consumption and the Pigovian tax is determined by the substitutability between labour and polluting consumption or clean and polluting consumption, depending on whether a wage tax system or a commodity tax system is being considered. The key factor determining the relationship between the two taxes is gross substitutability between the two taxed goods. As long as there is gross substitutability, the optimal dirt tax exceeds the Pigovian tax. The opposite can occur if and only if the two goods are gross complements.

Suggested Citation

  • Fuest, Clemens & Huber, Bernd, 1999. "Second-best pollution taxes," Munich Reprints in Economics 20299, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:20299
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    Cited by:

    1. Pitafi, Basharat A.K. & Roumasset, James A., 2002. "Optimal Green Taxation with Both Emission and Commodity Taxes," 2002 Annual meeting, July 28-31, Long Beach, CA 19693, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. A. Bovenberg, 1999. "Green Tax Reforms and the Double Dividend: an Updated Reader's Guide," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 421-443, August.
    3. Mark R. Thompson, 2016. "The Moral Economy of Electoralism and the Rise of Populism in the Philippines and Thailand," Journal of Developing Societies, , vol. 32(3), pages 246-269, September.

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