We examine the efficiency of decentralized commodity taxation in the context of an international trade model, where consumption tax revenue finances public sector activities related to international spillovers. We consider two cases; tax revenue finances (i) public pollution abatement in the presence of consumption-generated transboundary pollution, and (ii) the provision of an international public consumption good, in the absence of pollution. The key result of our study is that in either case, non-cooperative equilibrium origin-based consumption taxes are efficient, while destination-based taxes are not. When in the presence of international spillovers, consumption tax revenue is lump-sum distributed, neither type of consumption taxes is efficient.
