Optimal Taxation of Externalities Interacting Through Markets: A Theoretical General Equilibrium Analysis

38 Pages Posted: 1 Dec 2010

See all articles by Xiaolin Ren

Xiaolin Ren

affiliation not provided to SSRN

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

John B. Braden

University of Illinois at Urbana, Champaign - Department of Agricultural and Consumer Economics

Date Written: November 30, 2010

Abstract

This study develops a theoretical general equilibrium model to examine optimal externality tax policy in the presence of externalities linked to one another through markets rather than technical production relationships. Analytical results reveal that the second-best externality tax rate may be greater or less than the first-best rate, depending largely on the elasticity of substitution between the two externality-generating products. These results are explored empirically for the case of greenhouse gas from fossil fuel and nitrogen emissions associated with biofuels.

Keywords: second-best tax, multiple externalities, biofuel, GHG emissions, nitrogen leaching

JEL Classification: D50, H23, Q58

Suggested Citation

Ren, Xiaolin and Fullerton, Don and Braden, John B., Optimal Taxation of Externalities Interacting Through Markets: A Theoretical General Equilibrium Analysis (November 30, 2010). CESifo Working Paper Series No. 3259. Available at SSRN: https://ssrn.com/abstract=1717698

Xiaolin Ren (Contact Author)

affiliation not provided to SSRN

No Address Available

Don Fullerton

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

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

John B. Braden

University of Illinois at Urbana, Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
Urbana, IL 61801
United States

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