Taxing Externalities without Hurting the Poor
Research Seminars: Virtual Market Design SeminarThe paper presented in this Virtual Market Design Seminar considers the optimal taxation of a good that exhibits a negative externality in a setting where agents differ in their value for the good, their disutility from the externality, and their value for money, while the planner observes neither. Pigouvian taxation is the unique Pareto efficient mechanism, yet it is only optimal if the planner puts higher Pareto weights on richer agents. The authors derive the optimal tax schedules for both narrow allocative and utilitarian objectives of the planner. The optimal tax is generically nonlinear and Pareto inefficient. The optimal mechanism might take a “non-market” form and cap consumption or forbid it altogether. They illustrate the tractability of their model by deriving closed-form solutions for the log-normal and Rayleigh distribution. Finally, the authors calibrate their model and derive optimal taxes for the case of air travel.
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