IMPERFECT COMPETITION, LABOUR MARKET DISTORTIONS AND THE DOUBLE DIVIDEND HYPOTHESIS

Laura Marsiliani
Thomas I. Renström

The paper explores the hypothesis of a double dividend from environmental taxation, i.e. whether shifting the burden of taxation away from labour toward the environment can boost employment and increase welfare. We present a general equilibrium model where the economy is distorted by labour taxes, monopolistic product-market competition, and union wage bargaining. We find that employment and welfare always increase when the revenue from an introduction of a Pigouvian tax (imposed on firms and households) is fully recycled to cut the rate of the pre-existing labour tax. Moreover, it turns out that the degree of the imperfections influences the magnitude of the effects of the reform. We also offer numerical results for the case in which the pollution tax is positive at the outset.

Keywords:Double dividend, environmental tax reform, imperfect competition, welfare.

JEL classification: E62, H20, H23, H30.

Correspondence to:
L. Marsiliani, Department of Economics and Finance, University of Durham, 23-26 Old Elvet, Durham, DH1 3HY,
UK. Tel: +44-(0)191-334 6363. Fax: +44-(0)191-334 6341.
Email: [email protected] Web: http://www.dur.ac.uk/~dec0lm/

T.I. Renström, Department of Economics and Finance, University of Durham, 23-26 Old Elvet, Durham, DH1 3HY,
UK. Tel: +44-(0)191-334 6369. Fax: +44-(0)191-334 6341.
Email: [email protected] Web: http://www.dur.ac.uk/t.i.renstrom/

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