"More is less": The tax effects of ignoring flow externalities

Leif K. Sandal*, Stein Ivar Steinshamn, R. Quentin Grafton

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)


    Using a model of non-linear, non-monotone decay of the stock pollutant, and starting from the same initial conditions, the paper shows that an optimal tax that corrects for both stock and flow externalities may result in a lower tax, fewer cumulative emissions (less decay in emissions) and higher output at the steady state than a corrective tax that ignores the flow externality. This "more is less" result emphasizes that setting a corrective tax that ignores the flow externality, or imposing a corrective tax at too low a level where there exists only a stock externality, may affect both transitory and steady-state output, tax payments and cumulative emissions. The result has important policy implications for decision makers setting optimal corrective taxes and targeted emission limits whenever stock externalities exist.

    Original languageEnglish
    Pages (from-to)239-254
    Number of pages16
    JournalResource and Energy Economics
    Issue number3
    Publication statusPublished - Aug 2003


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