Optimal Redistributive Policy Under Disaster Risk: Self-Protection and Social Mitigation

Abstract

This paper examines the optimal mixed taxation of polluting goods and subsidies for self-protection under nonlinear income tax. The novel contribution of this paper is to take disaster risk into account, the probability which is determined by the total amount of polluting goods consumed by all individuals. I derive the properties of optimal allocations in the first and second best scenarios, and the tax wedges. In addition, I obtain the optimal tax scheme in cases where the government cannot observe each individual's consumption of polluting goods. The optimal tax rate on polluting goods includes both the Pigouvian term and the screening term, which is not shown in other tax schedules.

Keywords: Optimal taxation, externalities, self-protection

JEL Classification: D61, D63, H21, H41, H44