Document Type

Article

Publication Date

12-1-2013

Publication Title

Atlantic Economic Journal

First Page

349

Last Page

362

DOI

http://dx.doi.org/10.1007/s11293-013-9370-6

Abstract

Pigovian taxes on polluters are politically unpopular, but subsidies for non-polluting sources are politically attractive. This paper presents a linear demand and supply model and numerical example to explore the trade-offs between taxing polluting sources of a good versus subsidizing non-polluting sources of the same good. While the model (along with the associated numerical example) shows the optimality of Pigovian taxes, it also shows how much welfare is reduced if subsidies for nonpolluters are employed instead. Further, it shows the optimal tax, given any level of subsidy and the optimal subsidy, given any level of tax.

Rights

This is a preprint version of this article. The final publication is available at Springer via http://dx.doi.org/10.1007/s11293-013-9370-6.

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