Designing Economic Instruments for the Environment in a Decentralized Fiscal System

26 Pages Posted: 8 Feb 2012

See all articles by James Alm

James Alm

Tulane University

H. Spencer Banzhaf

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: April 2012

Abstract

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 take the region, and the government, as a given; that is, this work has neglected important distinctions and interactions between the geographic scope of different pollutants, the enforcement authority of various levels of government, and the fiscal responsibilities of the various levels of government. 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 and to choose tax instruments that can both finance these expenditures and correct the market failures of externalities?

Keywords: Economic instruments, Environmental federalism, Externalities, Fiscal decentralization, Market failure, Subsidiarity principle

Suggested Citation

Alm, James and Banzhaf, H. Spencer, Designing Economic Instruments for the Environment in a Decentralized Fiscal System (April 2012). Journal of Economic Surveys, Vol. 26, Issue 2, pp. 177-202, 2012, Available at SSRN: https://ssrn.com/abstract=2001202 or http://dx.doi.org/10.1111/j.1467-6419.2010.00632.x

James Alm (Contact Author)

Tulane University ( email )

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H. Spencer Banzhaf

affiliation not provided to SSRN

No Address Available

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