Abstract
We characterize the optimal policy for correcting externalities when redistribution is a concern. When mitigation costs are private and heterogeneous, redistribution through income taxation alone is insufficient: the Pigouvian tax must also vary with income. This result informs the design of optimal carbon dividend policies: equal per-capita rebates are optimal only if incomes are unrelated to key sources of heterogeneity, including (i) heterogeneity in mitigation costs and (ii) the redistributive weights placed on horizontal equity. Using Finnish administrative data, we find that the optimal corrective policy is progressive for vehicle use but regressive for electricity consumption.
Local Organizer: Niko Jaakkola