ENVIRONMENTAL TAXES,RELATIVE PRICES AND CHOICE OF TECHNIQUE IN A LINEAR MODEL OF PRODUCTION

A classical model of production is used to study the effects of environmental taxes on relative prices and on the choice of technique. It is shown that a taxation of energy inputs can induce cost-minimizing producers to switch to a technique that requires more total energy. An explanation for such a ‘perverse’ substitution is provided by showing that with a positive rate of profits the relative prices of (relatively) energy-intensive products can be higher with a higher tax rate.