A note on optimal taxation in the presence of externalities
Abstract I consider the problem of optimal taxation with externalities in a general setup encompassing most of optimal taxation models found in the literature. It is demonstrated that when direct taxation of externalities is possible, optimal taxes can be expressed as the sum of the optimal Pigouvian taxes and the optimal taxes in a related problem without externalities, regardless of what other tax instruments are available. This result generalizes the so-called ‘Principle of Targeting’.