Taxation in a Polluted Environment Abstract

This paper studies an optimal policy of public investments and commodity taxation which maximizes a sum of discounted generational utilities in an environment polluted by production and/or consumption activities. It is shown that (1) the optimal discount rate for pollution control (productive) public investment is (not generally) equal to the social time preference rate; (2) if pollution is caused by production processes, then the optimal wage and interest tax formulae partly consist of a weighted average of the Ramsey tax and the Pigovian tax; and (3) the introduction of public debt does not always warrant aggregate production efficiency. 1