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The relative efficiency of market-based environmental policy instruments with imperfect compliance

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  • Sandra Rousseau

    ()

  • Stef Proost

Abstract

This paper examines to what extent incomplete compliance of environmental regulation mitigates the distortions caused by pre-existing labour taxes. We study the relative cost efficiency of three market-based instruments: emission taxes, tradable permits and output taxes. In a first-best setting and given that monitoring and enforcement is costless, we find that the same utility levels can be reached with and without incomplete compliance. However, allowing for violations makes the policy instruments less effective. The nominal tax rate needs to be higher or the number of permits issued smaller, in order to obtain the required emission reduction. Including monitoring and enforcement aspects, and more specifically fines, into the model in a second-best setting, provides us with a new means of collecting tax revenues and of lessening existing tax distortions. We show that the relative position of grandfathered tradable permits vis-à-vis emission taxes improves considerably when allowing for incomplete compliance in a second-best setting

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s10797-007-9043-y
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 16 (2009)
Issue (Month): 1 (February)
Pages: 25-42

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Handle: RePEc:kap:itaxpf:v:16:y:2009:i:1:p:25-42

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Environmental policy instruments; Monitoring and enforcement; General equilibrium model; D5; H23; K42; Q58;

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References

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  1. Mayeres, Inge & Proost, Stef, 2001. "Marginal tax reform, externalities and income distribution," Journal of Public Economics, Elsevier, vol. 79(2), pages 343-363, February.
  2. Sandra Rousseau & Stef Proost, 2005. "Comparing Environmental Policy Instruments in the Presence of Imperfect Compliance – A Case Study," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(3), pages 337-365, November.
  3. Harford, Jon D., 1978. "Firm behavior under imperfectly enforceable pollution standards and taxes," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 26-43, March.
  4. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
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Cited by:
  1. Baumann, Florian & Friehe, Tim, 2013. "Design standards and technology adoption: Welfare effects of increasing environmental fines when the number of firms is endogenous," DICE Discussion Papers 106, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Sandra Rousseau & Stef Proost, 2005. "Comparing Environmental Policy Instruments in the Presence of Imperfect Compliance – A Case Study," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(3), pages 337-365, November.

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