The General Equilibrium Incidence of Environmental Taxes

23 Pages Posted: 9 Jun 2005 Last revised: 1 Jul 2014

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)

Garth Heutel

University of North Carolina (UNC) at Greensboro - Department of Economics

Date Written: May 2005

Abstract

We study the distributional effects of a pollution tax in general equilibrium, with general forms of substitution where pollution might be a relative complement or substitute for labor or for capital in production. We find closed form solutions for pollution, output prices, and factor prices. Various special cases help clarify the impact of differential factor intensities, substitution effects, and output effects. Intuitively, the pollution tax might place disproportionate burdens on capital if the polluting sector is capital intensive, or if labor is a better substitute for pollution than is capital; however, conditions are found where these intuitive results do not hold. We show exact conditions for the wage to rise relative to the capital return. Plausible values are then assigned to all the parameters, and we find that variations over the possible range of factor intensities have less impact than variations over the possible range of elasticities.

Suggested Citation

Fullerton, Don and Heutel, Garth, The General Equilibrium Incidence of Environmental Taxes (May 2005). NBER Working Paper No. w11311. Available at SSRN: https://ssrn.com/abstract=720402

Don Fullerton (Contact Author)

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

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Garth Heutel

University of North Carolina (UNC) at Greensboro - Department of Economics ( email )

Greensboro, NC 27402-6165
United States

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