On the Superiority of Corrective Taxes to Quantity Regulation

20 Pages Posted: 20 Jul 2000 Last revised: 7 Oct 2010

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: November 1997

Abstract

The traditional view of economists has been that corrective taxes are superior to direct" regulation of harmful externalities when the state's information about control costs is incomplete. " In recent years, however, many economists seem to have adopted the view that either corrective" taxes or quantity regulation could be superior to the other. One argument for this view with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax" schedule) even when harm is nonlinear. Corrective taxes are indeed superior to quantity" regulation if -- as seems more plausible -- the state can impose a nonlinear tax equal to the" schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm. " Another argument, associated with Baumol and Oates (1988), is that quantity regulation gains" appeal when the state is uncertain about the harm caused by an externality. In this case however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity" regulation.

Suggested Citation

Kaplow, Louis and Shavell, Steven, On the Superiority of Corrective Taxes to Quantity Regulation (November 1997). NBER Working Paper No. w6251. Available at SSRN: https://ssrn.com/abstract=226009

Louis Kaplow (Contact Author)

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National Bureau of Economic Research (NBER)

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Steven Shavell

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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