This paper explores sufficient conditions for the welfare-improving environmental policy reform in the Harris-Todaro economy. A rise in the pollution tax rate in the urban manufacturing has spillover effects on the two labor market distortions: the less-than-optimal manufacturing employment and the urban unemployment. If both are weakened the welfare improves. Otherwise, we need to develop an alternative sufficient condition. It is shown that there exists a range of welfare-improving pollution tax rates, and that it corresponds to the lower values of tax rate. This range may shrink by the wage subsidy policy and the technological change toward less pollution-intensive techniques.
ASJC Scopus subject areas
- Geography, Planning and Development