Externality-Correcting Taxes and Regulation
By Vidar Christiansen
The Scandinavian Journal of Economics, 114 (2), pages 358-383, june 2012.
In much of the literature on externalities, taxes and direct regulation have been considered as alternative policy instruments. Both instruments might be imperfect in practice, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider the cases either where taxes are imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases, we characterize the optimal instrument mix, and we show how changing the level of direct regulation alters the optimal externality tax.
Full-text (pdf). Notice: The full-text document is the final draft of the article, pre-refereeing.