Optimal taxation in the presence of a congested public good and an application to transport policy

In this paper we demonstrate that even if policies prior to reform have been rational, it is possible, in fact in certain policy areas likely, that a green tax reform, contrary to the perceived wisdom among economists, will be associated with a double-dividend, i.e. with both environmental and fiscal benefits. We first establish this theoretically by avoiding imposing potentially unrealistic separability assumptions, and by recognising that taxation involves administrative costs. To illustrate our theoretical results, we use graphical tools well-known from fishery economics to assess the effects of the introduction of a tax on road transport.