Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 699: Optimal Taxation and Transboundary Externalities - Are Endogenous World Market Prices Important?
Thomas Aronsson (), Lars Persson () and Tomas Sjögren ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Lars Persson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Tomas Sjögren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Abstract: This paper concerns income and commodity taxation in a multi-jurisdictional
framework with transboundary environmental damage. We assume that each jurisdiction
is large in the sense that its government is able to influence the world
market prices via public policy. In such a framework, a noncooperative Nash equilibrium
does not only imply that the commodity tax on the externality-generating
good is inefficiently low seen from the perspective of global well-being; it also
means that the marginal income tax rate is inefficiently high, and that too much
resources are spent on public goods. With the noncooperative Nash equilibrium
as a starting point, we also consider the welfare effects of policy coordination with
respect to taxation and public expenditures.
Keywords: Trade and Environment; Optimal Taxation; Externalities
29 pages, November 20, 2006
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