Imperfect Competition, Labour Market Distortions, and the Double Dividend Hypothesis. Theory and Evidence from Italian Data

Abstract

The paper explores the hypothesis of a double dividend from environmental taxation i.e. whether shifting the burden of taxation away from labour toward the environment can boost employment and increase welfare. We present a general-equilibrium model where the economy is distorted by labour taxes, monopolistic product-market competition, and union-wage bargaining. We find that employment and welfare always increase when the revenue from the introduction of a Pigouvian tax (imposed on firms and households) is fully recycled to cut the rate of the pre-existing labour tax. Moreover, it turns out that the degree of the imperfections influences the magnitude of the effects of the reform. We also offer numerical results for the case in which the pollution tax is positive at the outset.

Keywords: Double Dividend, Environmental Tax Reform, Imperfect Competition, Welfare

JEL Classification: E62, H20, H23, H30