Taxing Externalities Under Financing Constraints

26 Pages Posted: 20 Nov 2017

See all articles by Florian Hoffmann

Florian Hoffmann

Erasmus School of Economics

Roman Inderst

Goethe University Frankfurt

Ulf Moslener

Frankfurt School of Finance & Management gemeinn├╝tzige GmbH

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Date Written: November 2017

Abstract

We consider a production economy with externalities, which can be reduced by additional firm‐level expenditures. This requires firms to raise additional outside financing, leading to deadweight loss due to a standard agency problem vis‐à‐vis investors. Policy is constrained as firms are privately informed about marginal abatement costs. The optimal tax on externalities is non‐linear, thus, not implementable through tradable pollution rights alone, and lower than the Pigouvian tax for two reasons: first, higher outside financing creates additional deadweight loss; second, tax‐induced reallocation of resources reduces average productive efficiency. Combining taxes with grants tied to loans improves resource allocation and, thus, welfare.

Suggested Citation

Hoffmann, Florian and Inderst, Roman and Moslener, Ulf, Taxing Externalities Under Financing Constraints (November 2017). The Economic Journal, Vol. 127, Issue 606, pp. 2478-2503, 2017, Available at SSRN: https://ssrn.com/abstract=3073764 or http://dx.doi.org/10.1111/ecoj.12396

Florian Hoffmann (Contact Author)

Erasmus School of Economics ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Roman Inderst

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 gemeinn├╝tzige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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