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On the Superiority of Corrective Taxes to Quantity Regulation

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Author Info
Louis Kaplow
Steven Shavell

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Abstract

The traditional view of economists has been that corrective taxes are superior to direct regulation of harmful externalities when the state's information about control costs is incomplete. In recent years, however, many economists seem to have adopted a different view--that either corrective taxes or quantity regulation could be superior to the other. We emphasize that one argument for this newer view, identified with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax schedule) even when harm is nonlinear. But if--as seems more plausible--the state can impose a nonlinear tax equal to the schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm, then corrective taxes are superior to quantity regulation. Another argument favoring quantity regulation is that it gains appeal when the state is uncertain about the harm caused by an externality. In this case, however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity regulation. Copyright 2002, Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal American Law and Economics Review.

Volume (Year): 4 (2002)
Issue (Month): 1 (January)
Pages: 1-17
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Handle: RePEc:oup:amlawe:v:4:y:2002:i:1:p:1-17

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June. [Downloadable!] (restricted)
  2. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 595-601, October. [Downloadable!] (restricted)
  3. Mendelsohn, Robert, 1984. "Endogenous technical change and environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 11(3), pages 202-207, September. [Downloadable!] (restricted)
  4. Bohm, Peter & Russell, Clifford S., 1985. "Comparative analysis of alternative policy instruments," Handbook of Natural Resource and Energy Economics, in: A. V. Kneese† & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 1, chapter 10, pages 395-460 Elsevier. [Downloadable!] (restricted)
  5. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September. [Downloadable!] (restricted)
  6. Susan Rose-Ackerman, 1973. "Effluent Charges: A Critique," Canadian Journal of Economics, Canadian Economics Association, vol. 6(4), pages 512-28, November. [Downloadable!] (restricted)
  7. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208. [Downloadable!] (restricted)
  8. Dasgupta, Partha & Hammond, Peter & Maskin, Eric, 1980. "On Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Blackwell Publishing, vol. 47(5), pages 857-60, October. [Downloadable!] (restricted)
  9. Fishelson, Gideon, 1976. "Emission control policies under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 189-197, October. [Downloadable!] (restricted)
  10. Adar, Zvi & Griffin, James M., 1976. "Uncertainty and the choice of pollution control instruments," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 178-188, October. [Downloadable!] (restricted)
  11. Stavins, Robert & Keohane, Nathaniel & Revesz, Richard, 1997. "The Positive Political Economy of Instrument Choice in Environmental Policy," Discussion Papers dp-97-25, Resources For the Future. [Downloadable!]
  12. Butler, Richard V & Maher, Michael D, 1982. "The Control of Externalities in a Growing Urban Economy," Economic Inquiry, Oxford University Press, vol. 20(1), pages 155-63, January.
  13. Morgan, Peter J., 1983. "Alternative policy instruments under uncertainty: A programming model of toxic pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 10(3), pages 248-269, September. [Downloadable!] (restricted)
  14. Robert A. Collinge & Wallace E. Oates, 1982. "Efficiency in Pollution Control in the Short and Long Runs: A System of Rental Emission Permits," Canadian Journal of Economics, Canadian Economics Association, vol. 15(2), pages 347-54, May.
  15. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and environmental innovation," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 127-140, October. [Downloadable!] (restricted)
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  16. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Blackwell Publishing, vol. 41(4), pages 477-91, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stavins, Robert, 2003. "Market-Based Environmental Policies: What Can We Learn from U.S. Experience (and Related Research)?," Discussion Papers dp-03-43, Resources For the Future. [Downloadable!]
    Other versions:
  2. Steven Shavell, 2005. "Liability for Accidents," NBER Working Papers 11781, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Lori Bennear & Robert Stavins, 2007. "Second-best theory and the use of multiple policy instruments," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 37(1), pages 111-129, May. [Downloadable!] (restricted)
  4. Stavins, Robert, 2004. "Environmental Economics," Working Paper Series rwp04-051, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  5. Linda Cohen & Amihai Glazer, 2008. "Regulation with Budget Constraints Can Dominate Regulation by Price and by Quantity," Working Papers 080903, University of California-Irvine, Department of Economics. [Downloadable!]
  6. Frank Convery, 2009. "Origins and Development of the EU ETS," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(3), pages 391-412, July. [Downloadable!] (restricted)
  7. Claus Thustrup Kreiner & Nicolaj Verdelin, 2008. "Optimal Provision of Public Goods: A Synthesis," EPRU Working Paper Series 08-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  8. Stavins, Robert, 2001. "Lessons from the American Experiment with Market-Based Environmental Policies," Working Paper Series rwp01-032, Harvard University, John F. Kennedy School of Government. [Downloadable!]
    Other versions:
  9. Avraham D. Tabbach & Jacob Nussim, 2008. "Controlling Avoidance: Ex Ante Regulation Versus Ex Post Punishment," Review of Law & Economics, Berkeley Electronic Press, vol. 4(1). [Downloadable!]
  10. Henrik Vetter, 2007. "Taxes versus Permits in a Two-Stage Duopoly," The B.E. Journal of Theoretical Economics, Berkeley Electronic Press, vol. 7(1). [Downloadable!]
  11. Paul Mensink, 2004. "Instant Efficient Pollution Abatement under Non-Linear Taxation and Asymmetric Information: The Differential Tax Revisited," Working Papers 2004.124, Fondazione Eni Enrico Mattei. [Downloadable!]
  12. Claus Thustrup Kreiner & Nicolaj Verdelin, 2009. "Optimal Provision of Public Goods: A Synthesis," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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