Earmarking of pollution charges and the sub-optimality of the Pigouvian tax

One approach to internalising a negative externality of economic activity is to impose a Pigouvian tax equal to the marginal cost of the externality. However, this approach overlooks the possibility that the tax revenue can be earmarked to correct the externality directly, i.e. financing the environmental protection projects. It is found that a pure Pigouvian tax is usually not an optimal policy. This issue is examined in both partial and general equilibrium, static and dynamic settings. Certain conditions for justifying a pure Pigouvian tax or a fully earmarked tax scheme are developed.


Issue Date:
2001
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/117732
Published in:
Australian Journal of Agricultural and Resource Economics, Volume 45, Issue 4
Page range:
623-640
Total Pages:
18




 Record created 2017-04-01, last modified 2017-04-04

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