Abstract
The paper examines welfare improving revenue neutral marginal policy reforms for an economy with non-identical individuals and an externality with a feedback on the consumption of taxed commodities. The instruments considered are: indirect taxes, the uniform poll transfer and public abatement. This extends the framework of Ahmad and Stern [Journal of Public Economics, 25 (1984) 259–298], Bovenberg and de Mooij [American Economic Review, 84 (1994) 1085–1089] and Schöb [Oxford Economic Papers 48 (1996) 537–555]. The theory is illustrated for congestion caused by peak car transport. The desirability of a higher externality tax is shown to depend on: the efficiency effect of the revenue recycling, the externality benefit, the distributional characteristic of the commodities and the externality and the feedback effect.
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