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Household heterogeneity, aggregation, and the distributional impacts of environmental taxes

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  • Rausch, Sebastian
  • Schwarz, Giacomo A.
Abstract
This paper examines how the general equilibrium incidence of an environmental tax depends on the effect of different incomes and preferences of heterogeneous households on aggregate outcomes. We develop a Harberger-type model with general forms of preferences and substitution between capital, labor, and pollution in production that captures the impact of household heterogeneity and interactions with production characteristics on the general equilibrium. We theoretically show that failing to incorporate household heterogeneity can qualitatively affect incidence. We quantitatively illustrate that this aggregation bias can be important for assessing the incidence of a carbon tax, mainly by affecting the returns to factors of production. Our findings are robust to a number of extensions including alternative revenue recycling schemes, pre-existing taxes, non-separable utility in pollution, labor–leisure choice, and multiple commodities.

Suggested Citation

  • Rausch, Sebastian & Schwarz, Giacomo A., 2016. "Household heterogeneity, aggregation, and the distributional impacts of environmental taxes," Journal of Public Economics, Elsevier, vol. 138(C), pages 43-57.
    • Handle: RePEc:eee:pubeco:v:138:y:2016:i:c:p:43-57
    DOI: 10.1016/j.jpubeco.2016.04.004
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    More about this item

    Keywords

    Environmental tax incidence; Heterogeneous households; General equilibrium; Aggregation bias; Distributional impacts;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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