Sufficient Statistics for Imperfect Externality-Correcting Policies

54 Pages Posted: 7 Mar 2016  

Mark R. Jacobsen

University of California, San Diego (UCSD) - Department of Economics; Stanford University

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

James M. Sallee

University of California, Berkeley - Department of Agricultural & Resource Economics

Arthur van Benthem

University of Pennsylvania - Business & Public Policy Department

Date Written: March 2016

Abstract

Pigouvian taxes can fully correct for market failures due to externalities, but actual policies are commonly forced to deviate from the Pigouvian ideal due to administrative or political constraints. This paper derives sufficient statistics, which require a minimum of market information, that quantify the efficiency costs of such constraints on policy design. We demonstrate that, under certain intuitive conditions, standard output from a regression of true externalities on policy variables, including the R2 and the sum of squared residuals, have immediate welfare interpretations—they are sufficient statistics that compare alternative policies. We utilize our approach in three diverse empirical applications: random mismeasurement in externalities, imperfect spatial policy differentiation, and heterogeneity in the longevity of energy-consuming durable goods. Regarding the latter, we use our method and a novel data set and find that policies that regulate vehicle fuel-economy, but ignore the differences in average longevity across types of automobiles, recover only about one-quarter to one-third of the welfare gains achievable by a policy that also takes product longevity into account. In contrast, our other two empirical applications suggest that policy imperfections have only small welfare costs.

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Suggested Citation

Jacobsen, Mark R. and Knittel, Christopher R. and Sallee, James M. and van Benthem, Arthur, Sufficient Statistics for Imperfect Externality-Correcting Policies (March 2016). NBER Working Paper No. w22063. Available at SSRN: https://ssrn.com/abstract=2743062

Mark R. Jacobsen (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

Stanford University ( email )

Stanford, CA 94305
United States

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James M. Sallee

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

Arthur Van Benthem

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States
215-898-3013 (Phone)

HOME PAGE: http://bepp.wharton.upenn.edu/profile/21174/

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