In this paper, we use a simple model to examine the double dividend hypothesis and address the question: in order to control the pollution level, which the government should tax, consumption or production? We consider two cases: (1) capital income tax vs. pollution tax and (2) labor income tax vs. pollution tax. In the first case, the double dividend of environmental tax exists under the parameter used. However, in the second case, the labor income tax is distorted further except when capital and energy are comple- ments and the pollution tax is under 5%. Our analysis also suggests that the elasticity of substitution between capital and energy plays an important role to determine the elasticity of pollution with respect to the pollution tax. Fi- nally, we also show that taxing consumption is not an e¤ective way to control pollution.
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