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How Standards Drive Taxes: The Political Economy of Tailpipe Pollution

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Author Info

  • Gulati Sumeet

    () (University of British Columbia)

  • Roy Devesh

    () (International Food Policy Research Institute)

Abstract

To control tailpipe pollution, governments often use environmental product standards and consumption taxes in conjunction (for example, the use of fuel economy standards and gasoline taxes to restrict automobile pollution in the US). Further, the choice of standards and consumption taxes is often independently influenced by special interests. For example, domestic producers have the incentive to influence environmental product standards, and likewise, domestic consumers have the incentive to influence the choice of the consumption tax. In this paper we explore the political link between environmental standards and consumption taxes in the presence of independent special interests. We find that despite the independence of special interests, the political outcome is inextricably linked. This political link is different from the welfare maximizing second-best link usually expected between two related policies, and is crucial in correctly anticipating policy outcomes. Specifically, we find that the government's choice of an environmental standard influences political incentives in the choice of the consumption tax. As the environmental standard falls, a higher demand for the environmentally damaging product develops. This higher demand increases the incentives for consumers to lobby for lower consumption tax. Under certain conditions, this political link is large enough to result in a complementary relationship between the two policies in equilibrium. The complementary relationship implies that a lower standard results in a lower consumption tax and vice versa when the standard is higher.

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File URL: http://www.degruyter.com/view/j/bejeap.2007.7.1/bejeap.2007.7.1.1489/bejeap.2007.7.1.1489.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 7 (2007)
Issue (Month): 1 (January)
Pages: 1-23

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Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:9

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Web page: http://www.degruyter.com

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Cited by:
  1. Johan F.M. Swinnen & Thijs Vandemoortele, 2009. "Trade, Development, and the Political Economy of Public Standards," LICOS Discussion Papers 23609, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  2. Swinnen, Jo & Vandemoortele, Thijs, 2011. "Trade and the political economy of food standards," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/289067, Katholieke Universiteit Leuven.

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