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

36 Pages Posted: 12 Mar 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: March 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.

Suggested Citation

West, Sarah E. and Williams, Roberton C., Empirical Estimates for Environmental Policy Making in a Second-Best Setting (March 2004). NBER Working Paper No. w10330. Available at SSRN: https://ssrn.com/abstract=515763

Sarah E. West

Macalester College Dept. of Economics ( email )

1600 Grand Ave.
Saint Paul, MN 55105
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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 )

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

Resources for the Future ( email )

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Washington, DC 20036
United States

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