Gasoline-powered vehicles produce many negative externalities including
congestion, air pollution, global climate change, and accidents. A gasoline tax
is perhaps the best policy to jointly address these externalities. This paper
calculates the optimal gasoline tax for China. Using a model developed by Parry
and Small [1][2], we calculate the optimal adjusted Pigovian tax in China to be $1.58/gallon
which is 2.65 times more than the current level. Of the externalities
incorporated in this Pigovian tax, the congestion costs are taxed the most
heavily, at $0.82/gallon, followed by local air pollution, accident
externalities, and finally global climate change.
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