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Emissions taxes under double-sided environmental externalities

Author

Listed:
  • Abdul Baki, Ghina
  • Benchekroun, Hassan
  • Marrouch, Walid
Abstract
It is well established that if a polluter exercises market power, the optimal emission tax should be set below the Pigouvian level, i.e., the marginal damage of pollution. In this paper, we show that relying on this intuition can be misleading if pollution is generated by both production and consumption. Specifically, we build a partial equilibrium model based on a monopoly power exerted over a final product, where the production and consumption of this product impose an environmental externality. We find that the first best can be attained by a combination of taxes on pollution from production and consumption, where the tax on the polluting monopoly is set precisely at the Pigouvian level, whereas the tax on (price-taking) consumers is set below the Pigouvian level.

Suggested Citation

  • Abdul Baki, Ghina & Benchekroun, Hassan & Marrouch, Walid, 2024. "Emissions taxes under double-sided environmental externalities," Economics Letters, Elsevier, vol. 242(C).
    • Handle: RePEc:eee:ecolet:v:242:y:2024:i:c:s0165176524003689
    DOI: 10.1016/j.econlet.2024.111884
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    References listed on IDEAS

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    1. Xing Yin & Xiaolin Chen & Xiaolin Xu & Lianmin Zhang, 2020. "Tax or Subsidy? Optimal Carbon Emission Policy: A Supply Chain Perspective," Sustainability, MDPI, vol. 12(4), pages 1-13, February.
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    8. Alain-Désiré Nimubona & Bernard Sinclair-Desgagné, 2013. "The Pigouvian Tax Rule in the Presence of an Eco-Industry," Economics Bulletin, AccessEcon, vol. 33(1), pages 747-752.
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    12. Sandmo, Agnar, 2011. "Atmospheric externalities and environmental taxation," Energy Economics, Elsevier, vol. 33(S1), pages 4-12.
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    More about this item

    Keywords

    Environmental externality; Abatement; Emission tax; Market power;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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