Optimal Fiscal Policy and the Environment

Author/Editor:

Jenny E Ligthart

Publication Date:

September 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper studies the setting of optimal fiscal policy in a second-best world with environmental externalities. The optimal second-best pollution tax is shown to lie below the first-best Pigovian tax, particularly if substitution between labor and polluting intermediate inputs is easy, the labor supply curve is more elastic, and preexisting taxes are large. The optimal level of public abatement is derived from the modified Samuelson rule and is larger if society cares more for the environment, public funds are inexpensive, and public abatement is relatively productive. The analysis also shows that the Samuelson rule should be revised if allowance is made for nonseparabilities in preferences.

Series:

Working Paper No. 98/146

Subject:

English

Publication Date:

September 1, 1998

ISBN/ISSN:

9781451856613/1018-5941

Stock No:

WPIEA1461998

Format:

Paper

Pages:

28

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