Taxing Externalities Under Financing Constraints

38 Pages Posted: 14 Feb 2014

See all articles by Florian Hoffmann

Florian Hoffmann

University of Bonn

Roman Inderst

Goethe University Frankfurt

Ulf Moslener

Frankfurt School of Finance & Management gemeinnützige GmbH

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

We consider an economy where production generates externalities, which can be reduced by additional …firm level expenditures. This requires fi…rms to raise outside financing, leading to deadweight loss due to a standard agency problem vis-à-vis outside investors. Policy is constrained as fi…rms are privately informed about their marginal cost of avoiding externalities. We …first derive the optimal linear pollution tax, which is strictly lower than the Pigouvian tax for two reasons: First, higher …firm outside …financing creates additional deadweight loss; second, through redistributing resources in the economy, a higher tax reduces average productive efficiency. We analyze various instruments that achieve a more efficient allocation, in particular, nonlinear pollution taxes, which can no longer be implemented through a tradable permit scheme alone, and grants tied to loans, which are frequently observed in practice.

Suggested Citation

Hoffmann, Florian and Inderst, Roman and Moslener, Ulf, Taxing Externalities Under Financing Constraints (August 2013). Available at SSRN: https://ssrn.com/abstract=2395214 or http://dx.doi.org/10.2139/ssrn.2395214

Florian Hoffmann

University of Bonn ( email )

Adenauerallee 24-42
Bonn, 53113
Germany

Roman Inderst (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Ulf Moslener

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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