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Health Effects in a Model of Second-Best Environmental Taxation or Reconsidering "Reconsidering the Tax-Interaction Effect"

15 Pages Posted: 16 Dec 2000  

Roberton C. Williams III

University of Maryland - Department of Agricultural & Resource Economics; National Bureau of Economic Research (NBER); Resources for the Future

Date Written: December 2000

Abstract

The literature on environmental taxation in the presence of pre-existing distortionary taxes has shown that the interactions with pre-existing taxes tend to raise the cost of an environmental tax, and thus that the optimal environmental tax in that context is less than marginal environmental damages. A recent paper by Schwartz and Repetto (2000) challenges this finding, arguing that the health benefits from reduced pollution will also interact with pre-existing taxes, possibly causing the optimal environmental tax to exceed marginal environmental damages. Schwartz and Repetto's analysis aimed to account for health effects by representing environmental quality and leisure as substitutes in utility. The present paper employs an analytically tractable general equilibrium model that, in contrast with Schwartz and Repetto's analysis, explicitly considers health effects. It shows that interactions with health effects from pollution actually will tend to reduce the optimal environmental tax. This result contradicts Schwartz and Repetto's conclusion. This demonstrates the usefulness of explicitly modeling health effects, and it reinforces the general notion that tax-interactions tend to raise the costs of an environmental tax.

Suggested Citation

Williams, Roberton C., Health Effects in a Model of Second-Best Environmental Taxation or Reconsidering "Reconsidering the Tax-Interaction Effect" (December 2000). NBER Working Paper No. w8048. Available at SSRN: https://ssrn.com/abstract=254009

Roberton C. Williams III (Contact Author)

University of Maryland - Department of Agricultural & Resource Economics ( email )

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