Abstract
Pollution externalities between polluters should be taken into account in the design of corrective taxes. When the externalities are substantial and/or the number of polluters is large, the effluent levies on these firms do not necessarily result in a deadweight loss. Consequently, the second-best tax exceeds the marginal social cost of pollution. A more general rule is that the tax rate should be greater than the marginal social cost of pollution if and only if a marginal increase in the tax rate results in opposite effects on the changes of equilibrium emission level and output.
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Yin, X. Corrective Taxes under Oligopoly with Inter-Firm Externalities. Environmental and Resource Economics 26, 269–277 (2003). https://doi.org/10.1023/A:1026360104591
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DOI: https://doi.org/10.1023/A:1026360104591