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On the Superiority of Corrective Taxes to Quantity Regulation

Posted: 29 Feb 2008  

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

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Abstract

The traditional view of economists has been that corrective taxes are superior to direct regulation of harmful externalities when the state's information about control costs is incomplete. In recent years, however, many economists seem to have adopted a different view-that either corrective taxes or quantity regulation could be superior to the other. We emphasize that one argument for this newer view, identified with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax schedule) even when harm is nonlinear. But if-as seems more plausible-the state can impose a nonlinear tax equal to the schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm, then corrective taxes are superior to quantity regulation. Another argument favoring quantity regulation is that it gains appeal when the state is uncertain about the harm caused by an externality. In this case, however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity regulation.

Suggested Citation

Kaplow, Louis and Shavell, Steven, On the Superiority of Corrective Taxes to Quantity Regulation. American Law and Economics Review, Vol. 4, No. 1, pp. 1-17, 2002. Available at SSRN: https://ssrn.com/abstract=874193

Louis Kaplow (Contact Author)

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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Steven Shavell

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Law School ( email )

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Cambridge, MA 02138
United States
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