Environmental Controls, Scarcity Rents, and Pre-Existing Distortions

43 Pages Posted: 8 Dec 1997 Last revised: 6 Oct 2010

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)

Gilbert E. Metcalf

Tufts University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1997

Abstract

Debate about the Double Dividend Hypothesis has focused on whether an environmental policy raises revenue that can be used to cut other distorting taxes. In this paper, we show that this focus is misplaced. We derive welfare results for alternative policies in a series of analytical general equilibrium models with clean and dirty goods that might be produced using emissions as well as other resources, in the presence of other pre-existing distortions such as labor taxes or even monopoly pricing. We show that the same welfare effects of environmental protection can be achieved, without exacerbating the labor distortion, by taxes that raise revenue, certain command and control regulations that raise no revenue, and even subsidies that cost revenue. Instead, the pre-existing labor tax distortion is exacerbated by policies that generate privately-retained scarcity rents. These rents raise the cost of production, raise equilibrium output prices, and thus reduce the real net wage. Such policies include both quantity-restricting command and control policies and certain marketable permit policies.

Suggested Citation

Fullerton, Don and Metcalf, Gilbert E., Environmental Controls, Scarcity Rents, and Pre-Existing Distortions (July 1997). NBER Working Paper No. w6091. Available at SSRN: https://ssrn.com/abstract=45249

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
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(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Gilbert E. Metcalf

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States
617-627-3685 (Phone)
617-627-3917 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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