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The Case for a Two-Part Instrument: Presumptive Tax and Environmental Subsidy

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Author Info
Don Fullerton
Ann Wolverton

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Abstract

This paper builds two simple general equilibrium models to demonstrate the equivalence between the Pigovian tax and the combination of a presumptive tax and an environmental subsidy. A presumptive tax is a tax that is imposed under the presumption that all production uses a dirty technology or all consumption goods become waste. The environmental subsidy is then provided only to the extent that production uses a cleaner technology or that consumption goods are recycled. To analyze the usefulness of the tax-subsidy combination, we review conceptual considerations regarding its implementation and practical considerations regarding its actual use throughout the world. While the tax-subsidy combination is increasingly being used, in the form of a deposit-refund system, we argue that more flexible interpretations are important to explore. The two parts of such a policy do not have to apply to the same side of the market. The tax and subsidy do not have to equal one another, and they can apply to different goods altogether. Compared to the Pigovian tax, a two-part instrument may be easier to enforce, may be easier to enact, and can still force the market to recognize the social cost of disposal.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5993.

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Date of creation: Apr 1997
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Handle: RePEc:nbr:nberwo:5993

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Find related papers by JEL classification:
Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply (the Commons)
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

References listed on IDEAS
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  1. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-53, March. [Downloadable!] (restricted)
  2. Eskeland, Gunnar S, 1994. "A Presumptive Pigovian Tax: Complementing Regulation to Mimic an Emissions Fee," World Bank Economic Review, Oxford University Press, vol. 8(3), pages 373-94, September.
  3. Fullerton Don & Kinnaman Thomas C., 1995. "Garbage, Recycling, and Illicit Burning or Dumping," Journal of Environmental Economics and Management, Elsevier, vol. 29(1), pages 78-91, July. [Downloadable!] (restricted)
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  4. Hilary A. Sigman, 1995. "A Comparison of Public Policies for Lead Recycling," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 452-478, Autumn. [Downloadable!] (restricted)
  5. Miedema, Allen K., 1983. "Fundamental economic comparisons of solid waste policy options," Resources and Energy, Elsevier, vol. 5(1), pages 21-43, March. [Downloadable!] (restricted)
  6. Porter, Richard C., 1978. "A social benefit-cost analysis of mandatory deposits on beverage containers," Journal of Environmental Economics and Management, Elsevier, vol. 5(4), pages 351-375, December. [Downloadable!] (restricted)
  7. Fullerton, Don, 1997. "Environmental Levies and Distortionary Taxes: Comment," American Economic Review, American Economic Association, vol. 87(1), pages 245-51, March. [Downloadable!] (restricted)
  8. Dinan Terry M., 1993. "Economic Efficiency Effects of Alternative Policies for Reducing Waste Disposal," Journal of Environmental Economics and Management, Elsevier, vol. 25(3), pages 242-256, November. [Downloadable!] (restricted)
  9. Lee, Dwight R. & Graves, Philip E. & Sexton, Robert L., 1992. "Controlling the abandonment of automobiles: Mandatory deposits vs fines," Journal of Urban Economics, Elsevier, vol. 31(1), pages 14-24, January. [Downloadable!] (restricted)
  10. 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)
  11. Don Fullerton, 1996. "Why Have Separate Environmental Taxes?," NBER Working Papers 5380, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September. [Downloadable!] (restricted)
  13. Palmer, Karen & Walls, Margaret & Sigman, Hilary, 1996. "The Cost of Reducing Municipal Solid Waste," Discussion Papers dp-96-35, Resources For the Future. [Downloadable!]
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  14. Glenn Jenkins & RANJIT LAMECH, 1992. "Market-Based Incentive Instruments For Pollution Control," Development Discussion Papers 1992-2, JDI Executive Programs. [Downloadable!]
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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. Lawrence H. Goulder & Ian W. H. Parry & Roberton C. Williams III & Dallas Burtraw, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," NBER Working Papers 6464, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Eskeland, Gunnar S., 2000. "Environmental protection and optimal taxation," Policy Research Working Paper Series 2510, The World Bank. [Downloadable!]
  3. Don Fullerton & Gilbert Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," NBER Working Papers 6091, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Hilary Sigman, 2003. "Taxing Hazardous Waste: The U.S. Experience," Departmental Working Papers 200306, Rutgers University, Department of Economics. [Downloadable!]
  5. Hilary Sigman, 2003. "Targeting Lead in Solid Waste," Departmental Working Papers 200308, Rutgers University, Department of Economics. [Downloadable!]
  6. Don Fullerton & Sarah West, 1999. "Can Taxes on Cars and on Gasoline Mimic an Unavailable Tax on Emissions?," NBER Working Papers 7059, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Palmer, Karen & Walls, Margaret, 2000. "Upstream Pollution, Downstream Waste Disposal, and the Design of Comprehensive Environmental Policies," Discussion Papers dp-97-51-rev, Resources For the Future. [Downloadable!]
    Other versions:
  8. Walls, Margaret & Calcott, Paul, 2002. "Waste, Recycling, and "Design for Environment": Roles for Markets and Policy Instruments," Discussion Papers dp-00-30-rev, Resources For the Future. [Downloadable!]
  9. Simpson, R. David & Ferraro, Paul, 2000. "The Cost-Effectiveness of Conservation Payments," Discussion Papers dp-00-31, Resources For the Future. [Downloadable!]
  10. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Sjak Smulders & Herman R.J. Vollebergh, 1999. "Green Taxes and Administrative Costs: The Case of Carbon Taxation," NBER Working Papers 7298, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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