Environmental taxes in an economy with distortionary taxes

There is a large literature that discusses how the properties of emission taxes and other environmental policy instruments are affected by the existence of distortionary taxes. We extend this literature by including distributional concerns in a model wher e households differ in income earning ability. The second-best optimal environmental tax will be derived and compared with the first-best tax rate (i.e. the Pigovian level). In particular, we will discuss how the optimal environmental tax depends on - th e preferences of consumers, and in particular of how the leisure-consumption tradeoff may depend on the environmental quality - the social preference for equity