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Earmarking of pollution charges and the sub-optimality of the Pigouvian tax

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  • Jiang, Tingsong
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    Abstract

    One approach to internalising a negative externality of economic activity is to impose a Pigouvian tax equal to the marginal cost of the externality. However, this approach overlooks the possibility that the tax revenue can be earmarked to correct the externality directly, i.e. financing the environmental protection projects. It is found that a pure Pigouvian tax is usually not an optimal policy. This issue is examined in both partial and general equilibrium, static and dynamic settings. Certain conditions for justifying a pure Pigouvian tax or a fully earmarked tax scheme are developed.

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    Bibliographic Info

    Article provided by Australian Agricultural and Resource Economics Society in its journal Australian Journal of Agricultural and Resource Economics.

    Volume (Year): 45 (2001)
    Issue (Month): 4 (December)
    Pages:

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    Handle: RePEc:ags:aareaj:117732

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    Keywords: Environmental Economics and Policy;

    References

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    1. Lawrence H. Goulder & Ian W. H. Parry & Dallas Burtraw, 1996. "Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions," NBER Working Papers 5641, National Bureau of Economic Research, Inc.
    2. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future.
    3. Hartwick, John M, 1978. "Substitution among Exhaustible Resources and Intergenerational Equity," Review of Economic Studies, Wiley Blackwell, vol. 45(2), pages 347-54, June.
    4. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
    5. Ian W. H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," NBER Working Papers 5967, National Bureau of Economic Research, Inc.
    6. Hartwick, John M, 1977. "Intergenerational Equity and the Investing of Rents from Exhaustible Resources," American Economic Review, American Economic Association, vol. 67(5), pages 972-74, December.
    7. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, April.
    8. Don Fullerton & Gilbert E. Metcalf, 1997. "Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing?," NBER Working Papers 6199, National Bureau of Economic Research, Inc.
    9. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July.
    10. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120, April.
    11. Asako, Kazumi, 1980. "Economic growth and environmental pollution under the max-min principle," Journal of Environmental Economics and Management, Elsevier, vol. 7(3), pages 157-183, September.
    12. Parry, Ian W. H. & Williams III, Roberton C., 1999. "A second-best evaluation of eight policy instruments to reduce carbon emissions," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 347-373, August.
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    Cited by:
    1. Werner Hediger & Bernard Lehmann, 2007. "Multifunctional Agriculture and the Preservation of Environmental Benefits," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(IV), pages 449-470, December.
    2. Neva Novarro, 2004. "Do Policy-Makers Earmark to Constrain their Successors? The Case of Environmental Earmarking," Working Papers 0408, College of the Holy Cross, Department of Economics.

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