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Externality‐Correcting Taxes and Regulation

26 Pages Posted: 16 May 2012  

Vidar Christiansen

University of Oslo - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Stephen Smithson

London School of Economics & Political Science (LSE)

Date Written: June 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.

Keywords: Consumption externalities, imperfect policy instruments, Pigouvian taxes

JEL Classification: H21, H23

Suggested Citation

Christiansen, Vidar and Smithson, Stephen, Externality‐Correcting Taxes and Regulation (June 2012). The Scandinavian Journal of Economics, Vol. 114, Issue 2, pp. 358-383, 2012. Available at SSRN: https://ssrn.com/abstract=2060822 or http://dx.doi.org/10.1111/j.1467-9442.2012.01701.x

Vidar Christiansen (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

HOME PAGE: http://www.CESifo.de

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
011-47-22-855121 (Phone)
011-47-22-855035 (Fax)

Stephen Smithson

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 (0) 20 7955 7647 (Phone)
+44 (0) 20 7955 7385 (Fax)

HOME PAGE: http://is.lse.ac.uk/staff/smithson/

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