Empirical Estimates for Environmental Policy Making in a Second-Best Setting

36 Pages Posted: 19 Feb 2004

See all articles by Sarah E. West

Sarah E. West

Macalester College Dept. of Economics

Roberton C. Williams

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 15, 2004

Abstract

This study estimates parameters necessary to calculate the optimal second-best gasoline tax, most notably the cross-price elasticity between gasoline and leisure. Prior work indicates that in a second-best setting with distortionary income taxes, both the cost of environmental regulation and the optimal environmental tax rate depend crucially on the cross-price elasticity between a polluting good and leisure. However, no prior study on second-best environmental regulation has estimated this elasticity. Using household data, we find that gasoline is a relative complement to leisure, and thus that the optimal gasoline tax is significantly higher than marginal damages - the opposite of the result suggested by the prior literature. Following this approach to estimate cross-price elasticities with leisure for other major polluting goods could strongly influence estimates of optimal environmental taxes.

Keywords: Second-best environmental taxes, optimal taxes, demand system

JEL Classification: H21, H23, Q5

Suggested Citation

West, Sarah E. and Williams, Roberton C., Empirical Estimates for Environmental Policy Making in a Second-Best Setting (February 15, 2004). Available at SSRN: https://ssrn.com/abstract=504202 or http://dx.doi.org/10.2139/ssrn.504202

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

Roberton C. Williams (Contact Author)

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

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/cgi-bin/familyinfo.pl?a=a&user=roberton_williams

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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