Designing Economic Instruments for the Environment in a Decentralized Fiscal System

50 Pages Posted: 20 Apr 2016

See all articles by James Alm

James Alm

Tulane University

H. Spencer Banzhaf

Georgia State University - Department of Economics; PERC - Property and Environment Research Center; National Bureau of Economic Research (NBER)

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Date Written: October 1, 2007

Abstract

When external effects are important, markets will be inefficient, and economists have considered several broad classes of economic instruments to correct these inefficiencies. However, the standard economic analysis has tended to neglect important distinctions and interactions between the geographic scope of pollutants, the enforcement authority of various levels of government, and the fiscal responsibilities of the levels of government. For example, externalities generated in a particular local area may be confined to the local area or may spill over to other jurisdictions. Also, local governments may be well informed about how best to regulate or enforce pollution control within their jurisdiction, but they may not consider the effects of their actions on other jurisdictions. Finally, the existence of locally-generated waste emissions affects the appropriate assignment of both expenditure and tax responsibilities among levels of government. The standard analysis therefore focuses mainly upon an aggregate (or national) perspective, it typically ignores the possibility that the externality may be created and addressed by local governments, and it does not consider the implications of decentralization for the design of economic instruments targeted at environmental problems. This paper examines the implications of decentralization for the design of corrective policies; that is, how does one design economic instruments in a decentralized fiscal system in which externalities exist at the local level and in which subnational governments have the power to provide local public services, as well as to choose tax instruments that can both finance these expenditures and correct the market failures of externalities?

Keywords: Environmental Economics & Policies, Debt Markets, Taxation & Subsidies, Public Sector Economics & Finance, Emerging Markets

Suggested Citation

Alm, James and Banzhaf, H. Spencer, Designing Economic Instruments for the Environment in a Decentralized Fiscal System (October 1, 2007). World Bank Policy Research Working Paper No. 4379, Available at SSRN: https://ssrn.com/abstract=1024633

James Alm (Contact Author)

Tulane University ( email )

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H. Spencer Banzhaf

Georgia State University - Department of Economics ( email )

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PERC - Property and Environment Research Center

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