Optimal Taxation and Transboundary Externalities - Are Endogenous World Market Prices Important?

This paper concerns income and commodity taxation in a multi-jurisdictional <p> framework with transboundary environmental damage. We assume that each jurisdiction <p> is large in the sense that its government is able to influence the world <p> market prices via public policy. In such a framework, a noncooperative Nash equilibrium <p> does not only imply that the commodity tax on the externality-generating <p> good is inefficiently low seen from the perspective of global well-being; it also <p> means that the marginal income tax rate is inefficiently high, and that too much <p> resources are spent on public goods. With the noncooperative Nash equilibrium <p> as a starting point, we also consider the welfare effects of policy coordination with <p> respect to taxation and public expenditures.