My dissertation examines theoretically the effects of environmental taxation on welfare in various cases. Using a general equilibrium model, the first chapter shows that a Pigouvian tax provides a larger welfare gain than an output tax, since it induces substitution among inputs as well as reduction in output of the dirty good, while an output tax induces only the output reduction. Using data for China and the U.S., numerical simulation results show that the potential welfare loss from not being able to use a Pigouvian tax is much larger in developing countries than in developed countries. The second chapter focuses on the fact that recycled material needs reprocessing to be substitutable for virgin material. Reprocessing uses resources and, in the process, generates pollution. Incorporating these 'imperfect' characteristics into a simple general equilibrium model, I examine how these realistic factors affect the structure of taxsubsidy schemes when the Pigouvian taxes are not available. A generalized Deposit-Refund system can achieve the optimum if illegal dumping is not taxable. Without a Pigouvian tax on illegal dumping, recycling is subsidized for its role in diverting illegal disposal into proper disposal. If Pigouvian taxes on neither illegal disposal nor waste from imperfect reprocessing are available, a combination of output tax on reprocessed material and subsidies for clean inputs can be used to restore the optimum. In the process, another reason to subsidize recycling emerges: recycling is a clean input for imperfect reprocessing. The third chapter focuses on the validity of the results obtained in the first chapter in the case of two vertically-separated oligopolies where the upstream industry is polluting. Using an analytical partial equilibrium model, I show that a tax on pollution is potentially superior to a tax on intermediate good, since the former can utilize both the upstream firms' input substitutability and the downstream firms' input substitutability, while a tax on intermediate good only utilizes the downstream firms' input substitutability. I also derive the conditions that government can improve social welfare through various revenue-neutral tax reforms.

This dissertation consists of three essays on taxation. The first essay examines whether government policy, through the use of tax incentives, is able to encourage household savings. This essay analyzes the impact of the 1990 Education Savings Bond Program. This policy created an additional tax incentive for owners of existing government savings bonds, by allowing interest earnings to be exempt from income taxes in years where the household incurs a qualified education expense. Using the 1989 and 1992 Survey of Consumer Finance data sets, a difference-in-difference methodology is used to measure how household savings has changed over time for households with college-bound children as opposed to those without. Households without college-bound children do not need to save for education and thus are not affected by the program. The comparison of savings for the two groups, correcting for individual characteristics, reveals the impact of the Education Savings Bond Program. In addition, this procedure allows one to infer if there has been a crowding out effect due to the Education Savings Bond Program. The results indicate that the policy has not had an effect on household savings. The second essay uses two different estimation procedures to calculate the incidence of environmental taxes and compares the results. Both estimation procedures assume non-separability of leisure and so the labor response is incorporated into estimates of household behavior. The first method is the Almost Ideal Demand System (AIDS) model of Deaton and Muellbauer. The AIDS model assumes linear Engel curves and if this assumption is violated then welfare estimates are biased. The Quadratic Almost Ideal Demand System (QUAIDS) model of Banks, Blundell and Lewbel extends the AIDS model to allow for non-linear Engel curves. Households consume three goods -- a composite clean good, a composite energy good and leisure. Data on household consumption is from the Interview Survey component of the Consumer Expenditure Survey. The AIDS model finds the energy good and leisure to be substitutes while the QUAIDS model finds no relationship between the two goods. Moreover the AIDS model is found to overestimate the welfare loss of environmental taxes on low-income households but underestimate the welfare loss of environmental taxes on high-income households. The third essay again uses the Almost Ideal Demand System model of Deaton and Muellbauer to estimate demand for junk food as well as calculate the incidence of taxes on junk food. The model assumes households consume three goods -- a composite healthy food good, a composite unhealthy food good (junk food) and a composite nonfood good. Data on household consumption is from the Diary Survey component of the Consumer Expenditure Survey. The Diary Survey collects detailed data on food expenditures. Price data consists of price indices for various commodities which is available from the Bureau of Labor Statistics. The compensated own-price elasticities indicate that both healthy food and junk food have inelastic demand. In addition, healthy food and junk food are found to be substitutes. The elasticity values found are consistent with the literature.

The first essay studies the Marginal Cost of Funds in the existence of tax evasion. We develop a general equilibrium model of tax evasion, including the expected utility of taxpayers and three different revenue-raising government policies. In this rich model environment, we analytically derive the marginal cost of funds (MCF) for the alternative policy instruments. We consider two main fiscal reforms: the revision in the nonlinear tax scheme and the changes in enforcement mechanism (the audit and penalty rates). First, we derive the MCF for the tax reform and find its key determinants. The derived MCF is greater than the previous ones since it includes a "risk-bearing cost" as well as tax distortion. The reform in enforcement mechanism generates MCFs in different forms. Two more MCFs with respect to audit and penalty rates are presented. Finally, we compare these three different MCFs in numerical example and provide some policy implications. The second essay explores optimal tax structure in the presence of status effect. When the consumption of certain goods affects one's social status, this externality creates two opposite effects in a society. Seeking higher status through "positional goods" gives individuals much incentive to supply labor but still allocates income for less "nonpositional goods" as well. In this case, differential taxes on positional goods work as corrective instruments to internalize the social cost stemming from status seeking. Furthermore, the differential taxes generate revenue that can be used to alleviate preexisting income tax distortion. Thus, the differential taxes on positional goods could give so called "double dividend." I develop a game-theoretic model in which each individual with a different labor productivity unknown to the others engages in a status-seeking game, and the government has a revenue requirement. Then I show that, under a condition in which utility is separable between positional goods and leisure, a revenue-neutral shift in the tax mix away from nonlinear income taxes towards positional-good taxes enhances welfare. Hence, the differential taxes on positional goods are necessary together with the nonlinear income taxes for an optimal tax structure. The third essay explores the impact of increasing capital mobility on regional growth and environment. I develop an endogenous growth model in which each local government competes against the others, to induce imperfectly mobile stock of capital into its region. Then I show that an increase in capital mobility generates "tax importing" due to which each locality experiences a higher growth rate and more degraded environment. That is, the increasing mobility dampens the capital tax and transfers the burden of pollution abatement to the locality. This finding supports the hypothesis of "race to the bottom" in environmental standards. Identifying a reduction in overall welfare of residents, I consider two alternative federal interventions in the model: uniform environmental standard and requirement of lump sum transfer or tax. Both of these federal instruments enhance the residents' welfare.

Reducing greenhouse gas (GHG) emissions is critical to mitigating climate change and achieving greater energy security. The desire to understand what governmental tools and how to apply to protect the local and global environment effectively and efficiently is a core driver for researches in the subfield of environmental economics. Despite the progress made in the modeling of social welfare with environmental externalities, many questions regarding secondbest biofuel policies, interaction between biofuel policies and finance system, and connection between trade and the environment remain unanswered. To date, the indirect, general effects of biofuel policies on the general economy, through "fiscal interaction effects" have largely been ignored. The thesis designs a general equilibrium model to investigate the fiscal interaction effects of tax credit policy. The marginal costs caused by tax credit are higher than the marginal benefits. In the second-best setting with pre-existing fuel tax and labor tax, tax credit is welfare reducing. The optimal second-best tax credit is estimated at the level of $0.22/GEEG ($0.15/gallon), which is 67% lower than the current tax exemption. Monte Carlo analysis shows that the probability of tax credit at $0.22/GEEG or less is 29% and at the current level or less is 72%. Next the thesis analyzes the effects of the quantitative ethanol mandate from both positive and welfare perspectives. Given the pre-existing government distortions, ethanol mandate is welfare enhancing. In the presence of fuel tax and labor tax, the net welfare gain caused by the ethanol mandate is estimated to be 8.61 billion dollars while the net welfare loss caused by tax credit is estimated to 26.87 billion dollars. Consistent with previous studies, the results show that the ethanol mandate dominates tax credit. Last, the thesis analyzes the effects of an ad valorem tariff on the local and global environment and total social welfare using a modified Bertrand duopoly model with environmentally differentiated products. The results show that tariff imposed by the developed country improves the local and global environment while reducing the social welfare. If the developed country has a high environmental standard, the country should restrict its imports of the dirty products. If the less developed country restricts the imports of clean products from the developed country, its social welfare and the local and global environment will get worse compared to a free trade case.

Chapter 1: Tradable Permits under Environmental and Cost-reducing R & D: This chapter models simultaneous investments in both environmental and cost-reducing R & D by asymmetric Cournot duopolist. Pollution rights (emission permits) are allocated by the regulator and can be traded between firms. Both R & D competition and cooperation are considered. In a three-stage game, firms first invest in R & D, then trade permits, and then compete in output. The strategic interaction between different types of R & D investments is analyzed. It is found that giving more permits to one firm induces it to conduct more cost-reducing but less environmental R & D. The second-best optimal allocation of pollution rights is also analyzed. This allocation matters for social welfare under R & D competition, but is irrelevant under R & D cooperation. Moreover, the optimal allocation depends on R & D spillovers. This paper also studies the grandfathering of permits based on historical output. Compared with the second-best optimal allocation, the higher the emissions reduction level, the more likely that grandfathering allocates too few permits to the large firm and too many permits to the small firm. Adding an R & D budget constraint leads firms to under-invest in cost-reducing R & D relative to environmental R & D. Chapter 2: Tradable Permits under Environmental R & D between Upstream and Downstream Industries: This chapter models the simultaneous investments in environmental R & D by both downstream and upstream industries, with two symmetric firms within each industry competing à la Cournot. Pollution rights are allocated by the regulator, and firms can trade permits. R & D competition, intra-industry (horizontal), inter-industry (vertical) and both intra- and inter-industry (generalized) R & D cooperations are considered. In a four-stage game, firms first invest in R & D, then trade permits, then upstream firms compete in intermediate good production, and finally downstream firms compete in final food production. The strategic interactions between R & D investments are analyzed. It is found that an increase in either vertical or horizontal R & D spillovers reduce the permit price but increase production, but the spillover effects on R & D investments are ambiguous and they depend on the number of permits that a firm receives from the government. However, firms undertake more R & D under generalized cooperation than vertical cooperation, irrespective of spillovers and the allocation of permits, and this results in higher social welfare under generalized cooperation than vertical cooperation. The optimal allocation of pollution rights by the regulator is also considered. This allocation matters for social welfare under R & D competition and horizontal cooperation, but is irrelevant under vertical and generalized cooperations. Chapter 3: Is There a Principle of Targeting in Environmental Taxation?: This chapter studies whether the "principle of targeting", which is referred to by Dixit (1985) as the tax formulae for dirty goods have "additivity property" (Sandmo 1975) and externality-generating sources should be directly targeted (Bhagwati and Johnson 1960), can be applicable in the presence of a uniform commodity tax with an additional emissions tax. We consider three perfectly competitive markets, one of them produces a non-polluting good and the other two produce polluting goods. The regulator chooses optimal taxes on all three markets to maximize social welfare and finances an exogenous public expenditure. First all, it is found that the additivity property does not hold under differentiated taxes, and is even further weakened with a uniform commodity tax. It is also shown that the Pigouvian tax is unlikely to apply on the top of the uniform commodity tax. Furthermore, if there is only tax instrument available -- i.e. either the uniform commodity tax or the emissions tax -- then the uniform commodity tax (emissions tax) induces higher social welfare when marginal social damage is low (high).