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Pollution Taxes in a Second-Best World

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  • Gilbert E. Metcalf

    (Tufts University and NBER)

Abstract

The purpose of this paper is to analyse recent issues involved in setting environmental taxes in a second-best world. This is an area that has seen an explosion of research and new insights over the past decade and also an area with which many EU countries (as well as candidate EU countries) have been grappling. The basic message of this paper is that the policy prescriptions that most of us learned when studying environmental policy in isolation (that is, in partial equilibrium) often must be significantly adapted once one moves to a general equilibrium framework with pre-existing distortions. Put this way, there is nothing novel here; it is simply a restatement of the Theorem of the Second Best (Lipsey and Lancaster (1956-1957)). This, however, risks trivializing the literature of the past decade. More important, the new literature has clarified our understanding of environmental distortions and policy making in important ways and opened up whole new areas of analysis.

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Bibliographic Info

Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

Volume (Year): 4 (2003)
Issue (Month): 1 (December)
Pages: 21-34

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Handle: RePEc:bic:journl:v:4:y:2003:i:1:p:21-34

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  1. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  2. A. Lans Bovenberg & Lawrence H. Goulder, 2000. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does it Cost?," NBER Working Papers 7654, National Bureau of Economic Research, Inc.
  3. Bovenberg, A. L. & van der Ploeg, F., 1994. "Environmental policy, public finance and the labour market in a second-best world," Journal of Public Economics, Elsevier, vol. 55(3), pages 349-390, November.
  4. Mustafa H. Babiker & Gilbert E. Metcalf & John Reilly, 2002. "Tax Distortions and Global Climate Policy," Discussion Papers Series, Department of Economics, Tufts University 0211, Department of Economics, Tufts University.
  5. Atkinson, Anthony B & Stern, N H, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 119-28, January.
  6. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-53, March.
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