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Policy Analysis in a Second-Best World

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Author Info
Parry, Ian () (Resources for the Future)
Oates, Wallace () (Resources for the Future)

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Abstract

This paper first describes the new literature in environmental economics on the so-called "double dividend" and then explores its implications for a broad range of economic issues. The basic finding in this literature is that in a second-best, general equilibrium setting, environmental measures raise costs and prices and thereby reduce the real wage. This rise in the cost of living reduces slightly the quantity of labor supplied in an already highly distorted labor market, giving rise to losses in social welfare that can be large relative to the basic welfare gains from improved environmental policy. These losses may be offset to some extent by using revenues (if any) from the environmental programs to reduce existing taxes on labor. This same line of analysis applies to many programs and institutions in the economy that raise the cost of living: tariffs and quotas on imports, agricultural price-support programs, monopoly pricing, programs of occupational licensure that limit entry, and many others. The paper thus suggests that traditional, partial equilibrium benefit-cost analysis has, in many instances, unwittingly omitted a potentially quite significant class of social costs from the calculations.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-98-48.

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Date of creation: 01 Sep 1998
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Handle: RePEc:rff:dpaper:dp-98-48

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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. 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. Parry, Ian, 1998. "The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions," Discussion Papers dp-98-37, Resources For the Future. [Downloadable!]
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  3. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54. [Downloadable!] (restricted)
  4. Williams III, Roberton C., 1999. "Revisiting the cost of protectionism:: The role of tax distortions in the labor market," Journal of International Economics, Elsevier, vol. 47(2), pages 429-447, April. [Downloadable!] (restricted)
  5. 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)
  6. Bovenberg, A.L. & Van Der Ploeg, F., 1992. "Environmental Policy, Public Finance and the Labour Market in a Second- Best World," Papers 9243, Tilburg - Center for Economic Research.
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  7. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November. [Downloadable!] (restricted)
  8. 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)
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  9. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March. [Downloadable!] (restricted)
  10. Browning, Edgar K., 1997. "A neglected welfare cost of monopoly--and most other product market distortions," Journal of Public Economics, Elsevier, vol. 66(1), pages 127-144, October. [Downloadable!] (restricted)
  11. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September. [Downloadable!] (restricted)
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  12. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers dp-97-18-rev, Resources For the Future. [Downloadable!]
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  13. 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)
  14. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July. [Downloadable!] (restricted)
  15. Parry, Ian W. H., 1997. "Environmental taxes and quotas in the presence of distorting taxes in factor markets," Resource and Energy Economics, Elsevier, vol. 19(3), pages 203-220, August. [Downloadable!] (restricted)
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(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. Parry, Ian & Bento, Antonio, 1999. "Revenue Recycling and the Welfare Effects of Road Pricing," Discussion Papers dp-99-45, Resources For the Future. [Downloadable!]
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  2. Raúl O'Ryan & Sebastian Miller & Carlos J. de Miguel, 2001. "Environmental Taxes, Inefficient Subsidies and Income Distribution in Chile: A CGE framework," Documentos de Trabajo 98, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  3. Dasgupta, Basab & Lall, Somik V., 2006. "Assessing benefits of slum upgrading programs in second-best settings," Policy Research Working Paper Series 3993, The World Bank. [Downloadable!]
  4. Parry, Ian, 1998. "The Costs of Restrictive Trade Policies in the Presence of Factor Tax Distortions," Discussion Papers dp-98-37, Resources For the Future. [Downloadable!]
    Other versions:
  5. Parry, Ian & Bento, Antonio, 1999. "Tax Deductible Spending, Environmental Policy, and the "Double Dividend" Hypothesis," Discussion Papers dp-99-24, Resources For the Future. [Downloadable!]
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