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Optimal Taxation of Externalities Interacting through Markets: A Theoretical General Equilibrium Analysis

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  • Xiaolin Ren
  • Don Fullerton
  • John B. Braden

Abstract

This study develops a theoretical general equilibrium model to examine optimal externality tax policy in the presence of externalities linked to one another through markets rather than technical production relationships. Analytical results reveal that the second-best externality tax rate may be greater or less than the first-best rate, depending largely on the elasticity of substitution between the two externality-generating products. These results are explored empirically for the case of greenhouse gas from fossil fuel and nitrogen emissions associated with biofuels.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-11/cesifo1_wp3259.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3259.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3259

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Keywords: second-best tax; multiple externalities; biofuel; GHG emissions; nitrogen leaching;

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References

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  1. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association, vol. 50(1), pages 59-88, March.
  2. Khanna, Madhu & Onal, Hayri & Chen, Xiaoguang & Huang, Haixiao, 2008. "Meeting Biofuels Targets: Implications for Land Use, Greenhouse Gas Emissions and Nitrogen Use in Illinois," Environmental and Rural Development Impacts Conference, October 15-16, 2008, St. Louis, Missouri, Farm Foundation, Transition to a Bio Economy Conferences 53491, Farm Foundation, Transition to a Bio Economy Conferences.
  3. Don Fullerton & Gilbert E. Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 9703, Department of Economics, Tufts University.
  4. Birur, Dileep & Hertel, Thomas & Tyner, Wally, 2008. "Impact of Biofuel Production on World Agricultural Markets: A Computable General Equilibrium Analysis," GTAP Working Papers 2413, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  5. Christopher Knittel & Daniel Sperling, 2006. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," Working Papers, University of California, Davis, Department of Economics 625, University of California, Davis, Department of Economics.
  6. Farzad Taheripour, 2008. "Welfare Effects and Unintended Consequences of Ethanol Subsidies ," Review of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 30(3), pages 411-421.
  7. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, American Economic Association, vol. 95(4), pages 1276-1289, September.
  8. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, Elsevier, vol. 35(3), pages 333-354, April.
  9. Caplan, Arthur J. & Silva, Emilson C.D., 2005. "An efficient mechanism to control correlated externalities: redistributive transfers and the coexistence of regional and global pollution permit markets," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 68-82, January.
  10. Parry, Ian W. H., 1997. "Environmental taxes and quotas in the presence of distorting taxes in factor markets," Resource and Energy Economics, Elsevier, Elsevier, vol. 19(3), pages 203-220, August.
  11. Bovenberg, A.L. & Ploeg, F. van der, 1992. "Environmental policy, public finance and the labour market in a second-best world," Discussion Paper, Tilburg University, Center for Economic Research 1992-43, Tilburg University, Center for Economic Research.
  12. Abrahams, Nii Adote & Shortle, James S., 2004. "The Performance of Compliance Measures and Instruments for Nitrate Nonpoint Pollution Control Under Uncertainty and Alternative Agricultural Commodity Policy Regimes," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 33(1), April.
  13. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  14. Thomas W. Hertel & Kyle Stiegert & Harry Vroomen, 1996. "Nitrogen-Land Substitution in Corn Production: A Reconciliation of Aggregate and Firm-Level Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(1), pages 30-40.
  15. 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, Tilburg University urn:nbn:nl:ui:12-73560, Tilburg University.
  16. Peterson, Jeffrey M., 1999. "Optimal Agricultural Land Pricing Policies Under Multiple Externalities In A Global Economy," 1999 Annual meeting, August 8-11, Nashville, TN, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21613, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  17. Taheripour, Farzad & Dileep Birur & Thomas Hertel & Wally Tyner, 2007. "Introducing Liquid Biofuels into the GTAP Data Base," GTAP Research Memoranda, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University 2534, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  18. 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, European Association of Environmental and Resource Economists, vol. 37(1), pages 111-129, May.
  19. Molly Espey, 1996. "Explaining the Variation in Elasticity Estimates of Gasoline Demand in the United States: A Meta-Analysis," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 49-60.
  20. Burniaux, Jean-Marc & Truong Truong, 2002. "GTAP-E: An Energy-Environmental Version of the GTAP Model," GTAP Technical Papers 923, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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Cited by:
  1. Regnier Camille & Sophie Legras, 2014. "Urban Structure and Environmental Externalities," INRA UMR CESAER Working Papers, INRA UMR CESAER, Centre d'’Economie et Sociologie appliquées à l'’Agriculture et aux Espaces Ruraux 2014/2, INRA UMR CESAER, Centre d'’Economie et Sociologie appliquées à l'’Agriculture et aux Espaces Ruraux.

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