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The Use of Regression Statistics to Analyze Imperfect Pricing Policies

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  • Mark R. Jacobsen
  • Christopher R. Knittel
  • James M. Sallee
  • Arthur A. van Benthem

Abstract

Corrective taxes can solve many market failures, but actual policies frequently deviate from the theoretical ideal because of administrative or political constraints. We present a method to quantify the efficiency costs of constraints on externality-correcting policies or, more generally, the costs of imperfect pricing, using simple regression statistics. Under certain conditions, the R2 and the sum of squared residuals from a regression of true externalities on policy variables measure relative welfare gains from policies. We illustrate via four empirical applications: random mismeasurement of externalities, imperfect electricity pricing, heterogeneity in the longevity of energy-consuming durable goods, and imperfect spatial policy differentiation.

Suggested Citation

  • Mark R. Jacobsen & Christopher R. Knittel & James M. Sallee & Arthur A. van Benthem, 2020. "The Use of Regression Statistics to Analyze Imperfect Pricing Policies," Journal of Political Economy, University of Chicago Press, vol. 128(5), pages 1826-1876.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/705553
    DOI: 10.1086/705553
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    Citations

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    Cited by:

    1. Severin Borenstein & Ryan Kellogg, 2023. "Carbon Pricing, Clean Electricity Standards, and Clean Electricity Subsidies on the Path to Zero Emissions," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 4(1), pages 125-176.
    2. Rachel Griffith & Martin O’Connell & Kate Smith, 2022. "Price Floors and Externality Correction," The Economic Journal, Royal Economic Society, vol. 132(646), pages 2273-2289.
    3. Daniel Jaqua & Daniel Schaffa, 2022. "The case for subsidizing harm: constrained and costly Pigouvian taxation with multiple externalities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(2), pages 408-442, April.
    4. Filippo Maria D’Arcangelo & Ilai Levin & Alessia Pagani & Mauro Pisu & Åsa Johansson, 2022. "A framework to decarbonise the economy," OECD Economic Policy Papers 31, OECD Publishing.
    5. Martin O'Connell & Kate Smith, 2021. "Optimal sin taxation and market power," IFS Working Papers W21/30, Institute for Fiscal Studies.
    6. Robert W. Hahn & Robert D. Metcalfe, 2021. "Efficiency and Equity Impacts of Energy Subsidies," American Economic Review, American Economic Association, vol. 111(5), pages 1658-1688, May.
    7. Nicolas Astier, 2021. "Second‐best pricing for incomplete market segments: Application to electricity pricing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1287-1311, December.
    8. Antonio Bento & Noah S. Miller & Mehreen Mookerjee & Edson R. Severnini, 2021. "Time is of the Essence: Climate Adaptation Induced by Existing Institutions," NBER Working Papers 28783, National Bureau of Economic Research, Inc.
    9. Paul Calcott & Vladimir Petkov, 2023. "Choosing between imperfect proxies for a corrective tax," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(2), pages 245-275, April.

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