Journal of public economics vol:79 issue:2 pages:343-363
The paper examines welfare improving revenue neutral marginal policy reforms for an economy with non-identical individuals and an externality with a feedback on the consumption of taxed commodities. The instruments considered are: indirect taxes, the uniform poll transfer and public abatement. This extends the framework of Ahmad and Stern [Journal of Public Economics, 25 (1984) 259-298], Bovenberg and de Mooij [American Economic Review, 84 (1994) 1085-1089] and Schob [Oxford Economic Papers 48 (1996) 537-555]. The theory is illustrated for congestion caused by peak car transport. The desirability of a higher externality tax is shown to depend on: the efficiency effect of the revenue recycling, the externality benefit, the distributional characteristic of the commodities and the externality and the feedback effect. (C) 2001 Elsevier Science B.V. All rights reserved.