Can Taxes on Cars and on Gasoline Mimic an Unavailable Tax on Emissions?

33 Pages Posted: 12 Apr 1999 Last revised: 10 May 2000

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Sarah E. West

Macalester College Dept. of Economics

Date Written: March 1999

Abstract

A tax on vehicle emissions can efficiently induce all of the cheapest forms of abatement. Consumers could drive less, buy a smaller car with better gas mileage, use cleaner gasoline, and repair pollution control equipment (PCE). However, the technology is not yet available to measure and tax each car's total emissions. We thus investigate alternative instruments. In a simple model with identical consumers, we show conditions under which the same efficiency can be attained by the combination of a tax on gas, a tax on engine size , and a subsidy to PCE. In a model with heterogeneous consumers, the same efficiency can again be obtained, but only if each person's gasoline tax rate can be made to depend on the characteristics of the car. We solve for these first-best tax rates. Assuming that tax rates must be uniform across consumers, we then characterize second-best tax rates on gasoline and on characteristics.

Suggested Citation

Fullerton, Don and West, Sarah E., Can Taxes on Cars and on Gasoline Mimic an Unavailable Tax on Emissions? (March 1999). NBER Working Paper No. w7059. Available at SSRN: https://ssrn.com/abstract=159072

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Sarah E. West

Macalester College Dept. of Economics ( email )

1600 Grand Ave.
Saint Paul, MN 55105
United States
651-696-6482 (Phone)

HOME PAGE: http://www.macalester.edu/~wests

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