TY  - JOUR
AU  - Fullerton,Don
TI  - Second-Best Pollution Taxes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5511
PY  - 1996
Y2  - March 1996
UR  - http://www.nber.org/papers/w5511
L1  - http://www.nber.org/papers/w5511.pdf
N1  - Author contact info:
Don Fullerton
Department of Finance
University of Illinois
BIF Box#30 (MC520)
515 East Gregory Drive
Champaign, IL  61820
Tel: 217/244-3621
Fax: 217/244-3102
E-Mail: dfullert@illinois.edu
AB  - When government needs more revenue than is available from a pollution tax rate equal to marginal environmental damage, our intuition tells us to raise the tax on the clean good above zero and to raise the tax on the dirty good above that first-best Pigouvian rate.  Yet new results suggest that the second-best pollution tax is below the Pigouvian rate.  This note reconciles these views by pointing out that these new results use a labor tax to acquire additional revenue, and that the labor tax is equivalent to a uniform tax on both clean and dirty goods.  Thus, depending on the normalization, the total tax on the dirty good can be above the Pigouvian rate.  These recent results are meant to show that the difference between the tax on the dirty good and the tax on the clean good is less than the Pigouvian rate.  Any one tax rate can be set to zero as a conceptual matter, but implementation of some taxes might be easier than others as a practical matter.
ER  -