Taxation, migration, and pollution

This paper analyzes optimal fiscal, environmental and immigration policy fo r a single jurisdiction. In the presence of immigration quotas, taxes on th e output of externality-producing industries should be higher than indicate d by the standard rule for Pigovian corrective taxation. Immigration quotas are not optimal if fiscal instruments can be used to control immigration, and relaxation of immigration quotas generally increases domestic welfare. If optimal taxes are imposed on immigrants, no immigration quota should be imposed, and a version of the traditional Pigovian rule characterizes optim al taxation of domestic externalities. If production in the immigrants' cou ntry of origin causes trans-boundary spillovers, domestic welfare can be im proved by lighter taxation of immigrants or by further relaxation of immigr ation quotas.