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International Tax and Public Finance

, Volume 5, Issue 3, pp 379–396 | Cite as

Pollution, Factor Taxation and Unemployment

  • Erkki Koskela
  • Ronnie Schöb
  • Hans-Werner Sinn
Article

Abstract

When consumers choose between clean and dirty goods and the labour market clears, a green tax reform may not bring about a double dividend in the sense of increasing environmental quality and increasing employment. However, when firms choose between clean and dirty factors of production, and when there is unemployment, such a result is very likely to occur. The paper investigates a model of a monopolistic firm where labour and energy are factors of production and trade unions negotiate the wage rate, accepting some unemployment as a result of aggressive wage demands. It is shown that, in such a framework, a green tax reform will boost employment provided it does not increase the net-of-tax wage rate by too much. This is the case when the elasticity of substitution between labour and energy is greater than one, equal to one or not too far below one.

factor taxation green tax reform unemployment trade unions 

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Copyright information

© Kluwer Academic Publishers 1998

Authors and Affiliations

  • Erkki Koskela
    • 1
  • Ronnie Schöb
    • 2
  • Hans-Werner Sinn
    • 2
  1. 1.Department of EconomicsUniversity of HelsinkiHelsinkiFinland
  2. 2.Center for Economic StudiesUniversity of MunichMunichGermany

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