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The Importance of H...
The Importance of Habit Formation for Environmental Taxation
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- Löfgren, Åsa, 1972 (author)
- Gothenburg University,Göteborgs universitet,Institutionen för nationalekonomi med statistik, Enheten för miljöekonomi,Department of Economics, Environmental Economics Unit
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- Nordblom, Katarina, 1968 (author)
- Gothenburg University,Göteborgs universitet,Institutionen för nationalekonomi med statistik,Department of Economics
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(creator_code:org_t)
- Göteborg, 2006
- English.
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Series: Working Papers in Economics (online), 1403-2465 ; 204
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Abstract
Subject headings
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- We analyze how habit formation affects optimal environmental taxation, when consumption of a habitual good causes a negative external effect on the environment. In a simple two-period model, we show that optimal taxation is still Pigouvian, where tax rates equal marginal damage in each period. However, the magnitudes of the tax rates are affected by habit formation. Using simulations we show that since consumption of the habitual good increases over time, so does the optimal tax rate, implying a higher tax rate in period two than in period one. The discrepancy increases in habitual strength. Given the development of the tax rates over time we discuss the welfare loss from imposing a secondbest environmental tax and its relation to habitual strength. Further, we analyze how optimal taxation changes if we relax the assumption of time-consistency
Subject headings
- SAMHÄLLSVETENSKAP -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)
- SOCIAL SCIENCES -- Economics and Business -- Economics (hsv//eng)
Keyword
- Optimal taxation; environment; habit formation; secondbest; myopia
Publication and Content Type
- vet (subject category)
- rap (subject category)
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