Second-best pollution taxes and the structure of preferences

We characterize optimal taxes on polluting and nonpolluting goods in Ramsey and Mirrlees second-best environments. The polluting good tax differs from the Pigouvian tax by Ramsey terms in the first and by Stiglitz/Mirrlees pl us another adjustment term in the second. These terms can be positive, nega tive, or zero. If preferences are weakly separable in public and private go ods, with the private good subutility weakly separable in labor and produce d goods, nonpolluting goods are taxed uniformly and the concept of a tax di fferential between polluting and nonpolluting goods is well defined. The di fferential is then less than the Pigouvian tax in the Ramsey framework, but it can be greater, equal to, or smaller than the Pigouvian tax in the Mirr lees second best. In Mirrlees second best, if preferences are separable in labor supply and other goods, the second-best tax differential is identical to the Pigouvian tax.