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Nonseparable Utility and the Double Dividend Debate: Reconsidering the Tax-Interaction Effect

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  • Jesse Schwartz

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  • Robert Repetto
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    Abstract

    The literature on the use of environmental taxes inthe presence of distortionary (labor) taxes warns thata partial-equilibrium Pigouvian tax analysis is notappropriate because increasing the price of dirtygoods can futher aggravate the prexisting distortions. This argument is most frequently made assuming thatlabor is taxed to meet a fixed revenue requirement.When a dirty good is also taxed, others argue thatthis lowers workers' real wages, causing people toreduce their labor supply below its already suboptimallevel, aggravating labor market distortions. However,most papers ignore the effect that a cleanerenvironment can have on labor supply. That is, mostpast work has assumed that the quality of theenvironment is weakly separable in the utilityfunction. We argue that a cleaner environment canincrease labor supply, at least partially offsettingany incentive for workers to decrease their laborsupply. Further, we show explicitly how relaxing theseparability assumption affects the standardresults. Copyright Kluwer Academic Publishers 2000

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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 15 (2000)
    Issue (Month): 2 (February)
    Pages: 149-157

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    Handle: RePEc:kap:enreec:v:15:y:2000:i:2:p:149-157

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    Web page: http://www.springerlink.com/link.asp?id=100263

    Related research

    Keywords: double dividend; environmental taxes; non-separable externalities; tax-interaction effect;

    References

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    1. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
    2. Bovenberg, A.L. & Van Der Ploeg, F., 1992. "Environmental Policy, Public Finance and the Labour Market in a Second- Best World," Papers 9243, Tilburg - Center for Economic Research.
    3. Ostro, Bart D., 1983. "The effects of air pollution on work loss and morbidity," Journal of Environmental Economics and Management, Elsevier, vol. 10(4), pages 371-382, December.
    4. Krupnick, Alan J. & Harrington, Winston & Ostro, Bart, 1990. "Ambient ozone and acute health effects: Evidence from daily data," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 1-18, January.
    5. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes: General equilibrium analyses," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73560, Tilburg University.
    6. Ostro, Bart, 1994. "Estimating the health effects of air pollutants : a method with an application to Jakarta," Policy Research Working Paper Series 1301, The World Bank.
    7. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
    8. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September.
    9. Thijs Zuidema & Andries Nentjes, 1997. "Health damage of air pollution: An estimate of a dose-response relationship for the Netherlands," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(3), pages 291-308, April.
    10. 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.
    11. Portney, Paul R. & Mullahy, John, 1986. "Urban air quality and acute respiratory illness," Journal of Urban Economics, Elsevier, vol. 20(1), pages 21-38, July.
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    Cited by:
    1. Inge Mayeres & Denise Van Regemorter, 2008. "Modelling the Health Related Benefits of Environmental Policies and Their Feedback Effects: A CGE Analysis for the EU Countries with GEM-E3," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 135-150.
    2. David Meintrup & Chang Woon Nam, 2006. "Shadow Market Area for Air Pollutants," ERSA conference papers ersa06p412, European Regional Science Association.
    3. Nathalie Mathieu-Bolh & Xavier Pautrel, 2014. "Environmental taxation, health and the life-cycle," Working Papers hal-00930936, HAL.
    4. Jean-Christophe Caffet, 2005. "Health effects and optimal environmental taxes in welfare state countries," Cahiers de la Maison des Sciences Economiques v05049, Université Panthéon-Sorbonne (Paris 1).
    5. Rema Hanna & Paulina Oliva, 2011. "The Effect of Pollution on Labor Supply: Evidence from a Natural Experiment in Mexico City," NBER Working Papers 17302, National Bureau of Economic Research, Inc.
    6. Inge Mayeres & Denise Van Regemorter, 2003. "Modelling the health related benefits of environmental policies - a CGE analysis for the eu countries with gem-e3," Energy, Transport and Environment Working Papers Series ete0310, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
    7. Hirazawa, Makoto & Saito, Koichi & Yakita, Akira, 2011. "Effects of international sharing of pollution abatement burdens on income inequality among countries," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1615-1625, October.
    8. Haradhan Kumar Mohajan, 2011. "Optimal Environmental Taxes Due to Health Effect," KASBIT Journal of Management & Social Science, Khadim Ali Shah Bukhari Institute of Technology (KASBIT), vol. 4, pages 1-19, December.
    9. Rivers, Nicholas, 2013. "Renewable energy and unemployment: A general equilibrium analysis," Resource and Energy Economics, Elsevier, vol. 35(4), pages 467-485.
    10. repec:hal:journl:halshs-00194917 is not listed on IDEAS
    11. Williams III, Roberton C., 2003. "Health effects and optimal environmental taxes," Journal of Public Economics, Elsevier, vol. 87(2), pages 323-335, February.
    12. William Jaeger, 2011. "The Welfare Effects of Environmental Taxation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(1), pages 101-119, May.
    13. Çağatay Koç, 2007. "Environmental Quality, Medical Care Demand and Environmental Tax Interactions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(2), pages 431-443, June.
    14. Ronnie Schöb, 2003. "The Double Dividend Hypothesis of Environmental Taxes: A Survey," Working Papers 2003.60, Fondazione Eni Enrico Mattei.
    15. Brian Murray & Andrew Keeler & Walter Thurman, 2005. "Tax Interaction Effects, Environmental Regulation, and “Rule of Thumb” Adjustments to Social Cost," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 30(1), pages 73-92, January.
    16. Yew-Kwang Ng, 2004. "Optimal Environmental Charges/Taxes: Easy to Estimate and Surplus-yielding," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 28(4), pages 395-408, August.
    17. A. Bovenberg, 1999. "Green Tax Reforms and the Double Dividend: an Updated Reader's Guide," International Tax and Public Finance, Springer, vol. 6(3), pages 421-443, August.

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