Scandinavian Working Papers in Economics

Working Papers,
Swedish National Road & Transport Research Institute (VTI)

No 2006:3: Optimal Taxation of Intermediate Goods in the Presence of Externalities: A Survey Towards the Transport Sector

Joakim Ahlberg ()
Additional contact information
Joakim Ahlberg: VTI, Postal: VTI, Transport Economics, P.O. Box 6056, SE-171 06 Solna, Sweden

Abstract: The paper surveys the literature on optimal taxation with emphasis on intermediate goods, or, more specific, freight (road) transport. There are two models frequently used, first, the one emanated from Diamond & Mirrlees' (1971) paper, where the production efficiency lemma made it clear that intermediate goods was not to be taxed. And, second, the Ramsey-Boiteux model where a cost-of-service regulation imposes a budget constraint for the regulated firm. In the latter model, in contrast to the first, freight transports (intermediate goods) are to be taxed in the Ramsey tradition, and thus trades the production efficiency lemma against a budget restriction. The paper also discusses welfare effects due to environmental tax reforms, with emphasis to what has become to known as the double dividend hypothesis. Finally, administrative costs in the context of optimal taxation is touched upon, a subject that is to a large degree repressed in optimal tax theory.

Keywords: Optimal Taxation; Intermediate Goods; Transport; Welfare Effects; Environmental Tax; Administrative Costs

JEL-codes: H21; H23

43 pages, June 1, 2006

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