Internalizing Externalities in Second-Best Tax Systems

CES Working Paper 101

Posted: 24 Sep 1996

See all articles by Gerhard O. Orosel

Gerhard O. Orosel

University of Vienna - Department of Economics

Ronnie Schöb

Freie Universitaet Berlin; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 1995

Abstract

We analyze the analytical structure of optimal taxation of polluting and non-polluting goods in a second-best world where lump-sum taxes are infeasible. After deriving the environmental tax rate which exactly internalizes the external effect, we show how to separate the analysis of second-best optimal environmental taxes from the analysis of the tax structure which minimizes the excess burden. This separation reveals that standard results of optimal taxation essentially carry over to economies with externalities. Our approach clarifies the controversy regarding the relation between the first-best Pigovian tax rate on polluting goods and the optimal tax rate in a second-best world.

JEL Classification: H21, H23

Suggested Citation

Orosel, Gerhard O. and Schöb, Ronnie, Internalizing Externalities in Second-Best Tax Systems (December 1995). CES Working Paper 101. Available at SSRN: https://ssrn.com/abstract=4250

Gerhard O. Orosel (Contact Author)

University of Vienna - Department of Economics ( email )

Austria

Ronnie Schöb

Freie Universitaet Berlin ( email )

Boltzmannstraße 20
Berlin, Berlin 14195
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
572
PlumX Metrics