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Direct versus Indirect Remedies for Externalities

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  • Green, Jerry
  • Sheshinski, Eytan

Abstract

This paper is concerned with tax policies designed to obtain an improved competitive allocation in the presence of consumption externalities. It is known that the full optimum can, in general, be attained only through the imposition of excise taxes at different levels for different individuals. Since these may be ruled out (possibly because of implementation costs), one is confined to consider second-best taxes. The common interpretation of the Pigouvian principle has called for taxes on the externality-creating commodities. With no relationships between the consumption of different commodities the Pigouvian principle is obviously impeccable. But the existence of substitutes or complements for an externality-causing commodity raises the possibility of indirect policies: treating the externality through the markets for related goods. Obviously, if the direct policy is not feasible, the indirect treatment may provide some partial remedy. We show, however, that even when direct policies are available, the overall optimum may involve only indirect policies. An example with such a result is provided in the paper. We also list a number of cases in which the traditional prescription is confirmed, and the overall optimum involves only direct policies.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 84 (1976)
Issue (Month): 4 (August)
Pages: 797-808

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Handle: RePEc:ucp:jpolec:v:84:y:1976:i:4:p:797-808

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Web page: http://www.journals.uchicago.edu/JPE/

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References

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  1. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
  2. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  3. Otto A. Davis & Andrew Whinston, 1962. "Externalities, Welfare, and the Theory of Games," Journal of Political Economy, University of Chicago Press, vol. 70, pages 241.
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Citations

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Cited by:
  1. Eskeland, Gunnar S., 2000. "Externalities and production efficiency," Policy Research Working Paper Series 2319, The World Bank.
  2. Ann Wolverton & Don Fullerton, 2003. "The Two-Part Instrument in a Second-Best World," NCEE Working Paper Series 200304, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Aug 2003.
  3. Ashish Goel & Adam Meyerson & Thomas Weber, 2009. "Fair welfare maximization," Economic Theory, Springer, vol. 41(3), pages 465-494, December.
  4. Sheshinski, Eytan, 2004. "On atmosphere externality and corrective taxes," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 727-734, March.
  5. Dirk T.G. Ruebbelke & Eytan Sheshinski, 2005. "Transfers as a Means to Combat European Spillovers," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 225(6), pages 699-710, November.
  6. Kopczuk, Wojciech, 2003. "A note on optimal taxation in the presence of externalities," Economics Letters, Elsevier, vol. 80(1), pages 81-86, July.
  7. Eckerstorfer, Paul & Wendner, Ronald, 2013. "Asymmetric and Non-atmospheric Consumption Externalities, and Efficient Consumption Taxation," MPRA Paper 45521, University Library of Munich, Germany.
  8. Martin Altemeyer-Bartscher & Dirk T. G. Rübbelke & Eytan Sheshinski, 2007. "Policies to Internalize Reciprocal International Spillovers," CESifo Working Paper Series 2058, CESifo Group Munich.
  9. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
  10. Bjertnæs, Geir H. & Fæhn, Taran & Aasness, Jørgen, 2008. "Designing an electricity tax system in presence of international regulations and multiple public goals: An empirical assessment," Energy Policy, Elsevier, vol. 36(10), pages 3723-3733, October.
  11. Levinson, Arik & Shetty, Sudhir, 1992. "Los Angeles, Mexico City, Cubatao, and Ankara - Efficient environmental regulation : case studies of urban air pollution," Policy Research Working Paper Series 942, The World Bank.
  12. Vidar Christiansen & Stephen Smith, 2009. "Externality-correcting Taxes and Regulation," CESifo Working Paper Series 2793, CESifo Group Munich.
  13. Geir H. Bjertnæs & Taran Fæhn & Jørgen Aasness, 2008. "Designing an electricity tax system in presence of international regulations and multiple public goals: An empirical assessment," Discussion Papers 555, Research Department of Statistics Norway.
  14. Gareth Myles, 2000. "Taxation and economic growth," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 141-168, March.
  15. Gerard Russo, 1989. "Moral Hazard and Optimal Cigarette Taxation," Working Papers 198918, University of Hawaii at Manoa, Department of Economics.
  16. Jaime Sempere, 2000. "Optimal Tax Rules, Pigou Taxation, and the “Double Dividend”," Economia Mexicana NUEVA EPOCA, , vol. 0(1), pages 93-103, January-J.
  17. Gui, Benedetto & de Villemeur, Étienne, 2007. "Regulation of a Monopoly Generating Externalities," IDEI Working Papers 469, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jan 2011.
  18. Slivko, Olga, 2012. "Direct and indirect subsidies in markets with system goods in the presence of externalities. Preliminary version," Working Papers 2072/211631, Universitat Rovira i Virgili, Department of Economics.

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