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Energy Taxes and Aggregate Economic Activity

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Author Info
Julio J. Rotemberg
Michael Woodford

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Abstract

This paper shows that the output losses from energy taxes are significantly larger than usually computed when due account is taken of imperfect competition among energy using firms. Even with perfect competition among these firms, the loss in GNP is of the same order of magnitude as the revenue raised by these taxes. However, in the presence of imperfect competition the output losses are much higher. There are particularly large transitory losses in the immediate aftermath of energy price increases when firms act as implicitly colluding oligopolists. These losses become considerably smaller if energy taxes are phased-in. We also show that taxes that affect only household consumption of energy have much smaller effects. In particular, for the empirically plausible parameter values we consider, such taxes have no effect on employment or output in the non-energy sector.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4576.

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Date of creation: Dec 1993
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Handle: RePEc:nbr:nberwo:4576

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

References listed on IDEAS
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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  1. A. Lans Bovenberg & Lawrence H. Goulder, 1995. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes:General Equilibrium Analyses," NBER Working Papers 5117, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Carlos de Miguel & Baltasar Manzano, 2006. "Optimal Oil Taxation in a Small Open Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 438-454, July. [Downloadable!] (restricted)
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  3. Tim Besley, 2001. "From micro to macro: public policies and aggregate economic performance," Fiscal Studies, Institute for Fiscal Studies, vol. 22(3), pages 357-374, September. [Downloadable!]
  4. Lawrence H. Goulder, 1993. "Energy Taxes: Traditional Efficiency Effects and Environmental Implications," NBER Working Papers 4582, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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