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Optimal control of externalities in the presence of income taxation

Kaplow, Louis (2010) Optimal control of externalities in the presence of income taxation. Public Economics Programme Papers (PEP 02). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Abstract

AA substantial literature examines second-best environmental policy, focusing particularly on how the Pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation. Additional literature is motivated by the possibility that distributive concerns should amend the internalization prescription. It is demonstrated, however, that simple first-best rules - unmodified for labor supply distortion or distribution - are correct in a natural, basic formulation of the problem. Specifically, setting all commodity taxes equal to marginal harms (and subsidies equal to marginal benefits) can generate a Pareto improvement. Likewise, a marginal reform in the direction of the first-best can yield a Pareto improvement. Qualifications and explanations for differences from previous work are also presented.

Item Type: Monograph (Report)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2010 The Author
Divisions: STICERD
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 23 Jul 2014 11:53
Last Modified: 05 Jun 2020 23:19
Funders: Harvard University
URI: http://eprints.lse.ac.uk/id/eprint/58172

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