The Optimal Environmental Tax and Urban Unemployment in an Open Economy

Ichiroh Daitoh, Masaya Omote

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7 Citations (Scopus)

Abstract

This paper investigates how a rise in the urban pollution tax rate may affect urban unemployment and welfare in a small open Harris-Todaro (HT) model with intersectoral capital mobility. First, by formulating urban pollution as a dirty input in manufacturing, we find that an increase in the urban pollution tax rate can increase the level of urban unemployment even with intersectoral capital mobility. That is, the optimistic finding by Rapanos (2007) that environmental protection policy reduces urban unemployment in the long run does not always hold. Second, the (sub)optimal pollution tax rate under urban unemployment is higher than the Pigouvian tax rate (the marginal damage of pollution). This result opposes those of Beladi and Chao (2006) for a closed HT economy and that of Tsakiris (2008) for an open HT economy with sector-specific capital.

Original languageEnglish
Pages (from-to)168-179
Number of pages12
JournalReview of Development Economics
Volume15
Issue number1
DOIs
Publication statusPublished - 2011 Feb
Externally publishedYes

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ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development

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