Environmental taxation in a dualistic economy

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Courtesy of Cambridge University

In the framework of the Harris–Todaro model we introduce a production–production externality and assume that the activity in the urban sector negatively affects (pollutes) the rural sector. As a means of reducing pollution a tax is imposed on the production of the polluting sector and the distributional and employment effects, as well as the national income aspects of such a tax, are explored. We take two versions of the Harris–Todaro model, the short run, where only labour ismobile between the rural and the urban sector, and the longer run,where all factors of production are intersectorally mobile. Our findings indicate that taxation will reduce pollution, may favour employment in the rural sector, and under certain conditions will also reduce unemployment, particularly in the longer run. National income will be generally enhanced if the share of the agricultural output in national income is higher than the share of manufactures.

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