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The impacts of air-pollution motivated automobile consumption tax adjustments of China

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  • Xiao, Junji
  • Ju, Heng

Abstract

A concomitant of the rapid development of the automobile industry in China is the serious air pollution and carbon dioxide emission. There are various regulation instruments to reduce the air pollution from automobile sources. China government chooses a small-displacement oriented consumption tax as well as fuel tax to alleviate the worse air pollution. This paper evaluates the effects of both policy instruments on fuel consumption and social welfare. Our empirical results show that fuel tax decreases the total sale of new cars, which leads to a decline of total consumption of fuel from the new cars, but does not change the sale distribution over various fuel efficiency models; while consumption tax adjustment results in a skewed sale distribution toward more efficient new cars but increases the total consumption of fuel due to an enlarged sale. The effects of these two taxes on pollution depend on our assumption about the average fuel efficiency of outside goods. On the other hand, consumption tax leads to less social welfare loss; in particular, consumer surplus decreases in an order of magnitude less than that caused by fuel tax. Fuel tax actually transfers more welfare from private sector to the government.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27743.

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Date of creation: 07 Feb 2011
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Handle: RePEc:pra:mprapa:27743

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Keywords: China auto industry; welfare analysis; tax incidence; BLP model; tax progressivity;

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  1. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Research Reports 25164, University of Connecticut, Food Marketing Policy Center.
  2. Bento, Antonio M. & Goulder, Lawrence H. & Jacobsen, Mark R. & von Haefen, Roger H., 2007. "Distributional and Efficiency Impacts of Increased U.S. Gasoline Taxes," Working Papers 127021, Cornell University, Department of Applied Economics and Management.
  3. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
  4. Parry, Ian & Small, Kenneth, 2002. "Does Britain or the United States Have the Right Gasoline Tax?," Discussion Papers dp-02-12-, Resources For the Future.
  5. Don Fullerton & Li Gan, 2005. "Cost-Effective Policies to Reduce Vehicle Emissions," NBER Working Papers 11174, National Bureau of Economic Research, Inc.
  6. Timothy F. Bresnahan & Dennis A. Yao, 1985. "The Nonpecuniary Costs of Automobile Emissions Standards," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 437-455, Winter,.
  7. Robert W. Crandall, 1992. "Policy Watch: Corporate Average Fuel Economy Standards," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 171-180, Spring.
  8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  9. Dahl, Carol A, 1979. "Consumer Adjustment to a Gasoline Tax," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 427-32, August.
  10. Crandall, Robert W & Graham, John D, 1989. "The Effect of Fuel Economy Standards on Automobile Safety," Journal of Law and Economics, University of Chicago Press, vol. 32(1), pages 97-118, April.
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