Pareto-Efficient International Taxation in the Presence of Environmental Externalities

This study analyzes Pareto-efficient international taxation, comprising commodity taxes, tariffs, and environmental taxes, in a multicountry economy. In such an economy, each country has a distinct revenue constraint and there are various types of cross-border environmental externalities. We show that Pareto-efficient international taxation is characterized by the standard Ramsey commodity tax rule, the collinearity of the tariff vector, and general-equilibrium Pigouvian environmental taxation. Our Pigouvian tax formula is applicable to a wide variety of contexts, including global, regional, and localized pollution, and it yields important suggestions for the single pricing of cross-border pollution.