26 Pages Posted: 16 May 2012
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: 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
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