Discussion paper

DP19117 Pigouvian Income Taxation

This paper develops a mechanism design approach to study externalities and redistribution. The mechanism screens individuals’ social weights to strike a balance among broad distributional objectives, incentives to work, and incentives to reduce externalities. The welfare-optimal allocation can be decentralized through income taxation, defining income-dependent externality payments. Two applications use individual-level administrative data on incomes, pollution measures, and financial burdens to demonstrate how population characteristics shape the optimal policy on carbon emissions.


Ahlvik, L, M Liski and M Mäkimattila (2024), ‘DP19117 Pigouvian Income Taxation‘, CEPR Discussion Paper No. 19117. CEPR Press, Paris & London. https://cepr.org/publications/dp19117