Externalities and Optimal Taxation

Fondazione Eni Enrico Mattei Working Paper No. 19.98

30 Pages Posted: 12 Nov 1998

See all articles by Helmuth Cremer

Helmuth Cremer

University of Toulouse (GREMAQ & IDEI); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Firouz Gahvari

University of Illinois at Urbana-Champaign - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Norbert Ladoux

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ)

Date Written: October 1997

Abstract

This paper re-examines the optimal tax design problem (income and commodities) in the presence of externalities. The nature of the second-best, and the choice of the tax instruments, are motivated by the informational structure in the economy. The main results are: (i) environmental levies (linear or nonlinear) differ in formula from Pigouvian taxes by the expressions for the optimal tax on private goods; (ii) externalities do not affect commodity tax formulas (linear and nonlinear) for private goods; (iii) externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear; and (iv) a general income tax plus strictly Pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution (at any given consumption bundle).

JEL Classification: H21, H23

Suggested Citation

Cremer, Helmuth and Gahvari, Firouz and Ladoux, Norbert, Externalities and Optimal Taxation (October 1997). Fondazione Eni Enrico Mattei Working Paper No. 19.98, Available at SSRN: https://ssrn.com/abstract=128988 or http://dx.doi.org/10.2139/ssrn.128988

Helmuth Cremer (Contact Author)

University of Toulouse (GREMAQ & IDEI) ( email )

Toulouse, 31000
France
+33 1 6112 8606 (Phone)
+33 1 6112 8637 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Firouz Gahvari

University of Illinois at Urbana-Champaign - Department of Economics ( email )

313 David Kinley Hall, 1407 West Gregory Drive
Urbana, IL 61801
United States

HOME PAGE: http://www.economics.illinois.edu/people/fgahvari

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschingerstr. 5
Munich, DE-81679
Germany

Norbert Ladoux

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ)

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

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