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http://ssrn.com/abstract=225563
 
 

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Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions


Lawrence H. Goulder


Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Ian W. H. Parry


Resources for the Future

Dallas Burtraw


Resources for the Future

June 1996

NBER Working Paper No. w5641

Abstract:     
This paper examines the choice between revenue-raising and non-revenue-raising instruments for environmental protection in a second-best setting with pre- existing factor taxes. We find that interactions with pre-existing taxes influence the costs of regulation and seriously militate against pollution abatement policies that do not raise revenue. If the marginal environmental benefits from pollution reductions are below a certain threshold value, any amount of pollution abatement through non-revenue-raising (NRR) policies like emissions quotas is efficiency-reducing. Under conditions approximating S02 emissions from electric power plants in the U.S., efficiency gains vanish if marginal environmental benefits are below $109 per ton and an NRR policy is employed. These results are largely independent of the size of the regulated sector relative to the overall economy and stem from two underlying effects. The tax-interaction effect is the adverse impact in factor markets arising from reductions in after-tax returns to factors associated with the higher production costs caused by environmental regulation. This effect leads to significantly higher efficiency costs than what would apply in a first-best world with no pre-existing taxes. Revenue-raising regulations (taxes) enjoy a revenue-recycling effect that offsets much of the tax-interaction effect, but non-revenue-raising regulations (quotas) enjoy no such offset.For any target level of emissions reduction, the gross efficiency costs of quotas are higher than those of revenue-raising policies.. To the extent that government regulations of international trade or agricultural production raise the costs of output and thus reduce real factor returns, they generate much higher social costs than indicated by partial equilibrium analyses.

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Date posted: July 12, 2000  

Suggested Citation

Goulder, Lawrence H. and Parry, Ian W. H. and Burtraw, Dallas, Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions (June 1996). NBER Working Paper No. w5641. Available at SSRN: http://ssrn.com/abstract=225563

Contact Information

Lawrence H. Goulder (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3706 (Phone)
650-725-5702 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Resources for the Future
1616 P Street, NW
Washington, DC 20036
United States
Ian W. H. Parry
Resources for the Future ( email )
1616 P Street, NW
Washington, DC 20036
United States
202-328-5151 (Phone)
202-939-3460 (Fax)
HOME PAGE: http://www.rff.org/~parry
Dallas Burtraw
Resources for the Future ( email )
1616 P Street, NW
Washington, DC 20036
United States
202-328-5087 (Phone)
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