Tax and Subsidy Combinations for the Control of Car Pollution

37 Pages Posted: 19 Jul 2000 Last revised: 25 Jun 2001

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: July 2000

Abstract

Despite technological advances, an individual car's emissions still cannot be measured reliably enough to impose a Pigovian tax. This paper explores alternative market incentives that could be used instead. We solve for second-best combinations of uniform taxes on gasoline, engine size, and vehicle age. For 1,261 individuals and cars in the 1994 Consumer Expenditure Survey, we record the car's model, year, and number of cylinders. We then seek a corresponding car in data from the California Air Resources Board that shows the car's engine size, fuel efficiency, and emissions per mile. We calculate the welfare improvement from a zero-tax scenario to the ideal Pigovian tax, and we find that 71 percent of that gain can be achieved by the second-best combination of taxes on gas, size, and vintage. A gas tax alone attains 62 percent of that gain. These results are robust to variation in the elasticity of substitution among goods.

Suggested Citation

Fullerton, Don and West, Sarah E., Tax and Subsidy Combinations for the Control of Car Pollution (July 2000). NBER Working Paper No. w7774. Available at SSRN: https://ssrn.com/abstract=235730

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)

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Cambridge, MA 02138
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CESifo (Center for Economic Studies and Ifo Institute)

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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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