Åsa Löfgren
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Åsa Löfgren: Department of Economics, School of Economics and Commercial Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG
Abstract: We examine the effect of addictive behavior on a socially optimal environmental tax. If utility in part depends on past consumption and individuals are time-consistent, the socially optimal environmental tax is shown to be equal to the conventional Pigovian tax. In a second-best world where the social planner has a restriction on the future environmental tax level, the current optimal tax is no longer equal to the Pigovian tax. We extend the analysis with time-inconsistent (myopic) individuals to both the first (no restriction on future environmental tax) and second-best world (restriction on future environmental tax). Also, the importance of addiction in an environmental framework is discussed.
Keywords: Optimal taxation; environment; addiction; timeinconsistency; second-best
26 pages, March 12, 2003
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