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Environmental Tax Interactions when Pollution Affects Health or Productivity

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  • Williams, Roberton III

Abstract

Numerous recent studies have indicated that interactions with a tax-distorted labor market increase the cost of pollution regulation. However, these studies have made restrictive assumptions regarding individual preferences and have ignored key links between pollution, human health, and labor productivity. Together, these assumptions imply that the benefits of regulation do not affect labor supply. This paper develops an analytically tractable general equilibrium model that allows regulation to provide benefits through several different channels, including improved health or productivity. The model shows that when the benefits of reduced pollution come in the form of improved health or productivity, the benefits do affect labor supply, and therefore create a benefit-side tax-interaction effect in addition to the familiar cost-side interaction. This effect can magnify or diminish the benefits of reduced pollution. When reduced pollution boosts labor productivity, the effect substantially magnifies such benefits. When pollution affects consumer health, the effect will tend to be opposite, diminishing the benefits of reduced pollution. This result is of far more than just theoretical interest; the benefit-side interaction is of the same magnitude as the cost-side interaction, and thus can fundamentally affect the optimal level of regulation. The paper considers only environmental regulation, but the concepts developed here apply equally to other policies affecting productivity or health, such as research subsidies or occupational safety regulations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 44 (2002)
Issue (Month): 2 (September)
Pages: 261-270

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Handle: RePEc:eee:jeeman:v:44:y:2002:i:2:p:261-270

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Web page: http://www.elsevier.com/locate/inca/622870

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  1. Lawrence H. Goulder & Ian W.H. Parry & Dallas Burtraw, 1997. "Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions," RAND Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 28(4), pages 708-731, Winter.
  2. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 29(3), pages S64-S77, November.
  3. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers, Resources For the Future dp-97-18-rev, Resources For the Future.
  4. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 11-23, March.
  5. Victor R. Fuchs & Alan B. Krueger & James M. Poterba, 1998. "Economists' Views about Parameters, Values, and Policies: Survey Results in Labor and Public Economics," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 36(3), pages 1387-1425, September.
  6. Don Fullerton & Gilbert Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," NBER Working Papers 6091, National Bureau of Economic Research, Inc.
  7. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, Elsevier, vol. 72(3), pages 329-360, June.
  8. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 252-53, March.
  9. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, American Economic Association, vol. 86(4), pages 985-1000, September.
  10. Bovenberg, A Lans & van der Ploeg, Frederick, 1994. " Green Policies and Public Finance in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 96(3), pages 343-63.
  11. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  12. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association, National Tax Association, vol. 50(1), pages 59-88, March.
  13. Williams III, Roberton C., 1999. "Revisiting the cost of protectionism:: The role of tax distortions in the labor market," Journal of International Economics, Elsevier, Elsevier, vol. 47(2), pages 429-447, April.
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