Discussion paper
DP19117 Pigouvian Income Taxation
This paper develops a mechanism design approach to study externalities and redistribution. The mechanism screens individuals’ social weights to strike a balance among broad distributional objectives, incentives to work, and incentives to reduce externalities. The welfare-optimal allocation can be decentralized through income taxation, defining income-dependent externality payments. Two applications use individual-level administrative data on incomes, pollution measures, and financial burdens to demonstrate how population characteristics shape the optimal policy on carbon emissions.
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