A many-person Corlett-Hague tax rule with externalities

This study addresses environmental tax reforms in a many-personeconomy. Starting from a situation of uniform commodity taxation,a tax reform raising the tax on a good complementary to leisureor on a good that is environmentally harmful may be seen aswelfare-improving as long as environmental externalities donot affect commodity demand. When environmental quality reducescommodity demand, a trade-off arises between the direct beneficialimpact of the higher environmental tax and its indirect, harmfulimpact caused by reduced tax revenues. A second trade-off mayalso arise from a conflict between efficiency and distributionalequity.