Externality‐Correcting Taxes and Regulation
University of Oslo - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)
London School of Economics & Political Science (LSE)
The Scandinavian Journal of Economics, Vol. 114, Issue 2, pp. 358-383, 2012
In much of the literature on externalities, taxes and direct regulation have been considered as alternative policy instruments. Both instruments might be imperfect in practice, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider the cases either where taxes are imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases, we characterize the optimal instrument mix, and we show how changing the level of direct regulation alters the optimal externality tax.
Number of Pages in PDF File: 26
Keywords: Consumption externalities, imperfect policy instruments, Pigouvian taxes
JEL Classification: H21, H23
Date posted: May 16, 2012
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