Efficiency-distributional trade-offs in the taxation of environmental pollution

Internalizing the externality costs from environmental pollution with a tax has received a great deal of attention and discussion in environmental economics literature. The primary motivation for setting the size of the tax rate is usually driven by economic efficiency considerations, but distributive consequences may play an important role in the decision of whether to adopt a tax. This paper shows how these trade-offs can be addressed when environmental pollution is internalized with a tax.