Optimal redistributive policy under disaster risk: self-protection, social mitigation and social adaptation

In this paper, we examine the optimal mixed taxation of polluting goods and subsidies for self-protection under nonlinear income tax. The novel contribution of this paper is that we take into account disaster risk, the probability of which is determined by the total amount of polluting goods consumed by all individuals. We derive the properties of optimal allocations in the first-best and second-best scenarios, and the tax wedges. Additionally, we obtain the optimal tax scheme in cases in which the government cannot observe each individual's consumption of polluting goods. The optimal tax rate on polluting goods includes the Pigouvian term and the screening term under asymmetric information, and the optimal subsidy rate on goods for self-protection is discriminatory, which reflects that screening term. Additionally, we consider public expenditure aimed at reducing losses incurred as a result of disasters, in addition to other fiscal policies in an asymmetric information setting, and find that the optimal level is determined by a modified Samuelson rule that includes the screening term between households.