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Policy Analysis in a Second-Best World

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  • Parry, Ian

    ()
    (Resources for the Future)

  • Oates, Wallace

    ()
    (Resources for the Future)

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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Bibliographic Info

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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References

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  1. Don Fullerton & Gilbert Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," NBER Working Papers 6091, National Bureau of Economic Research, Inc.
  2. 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 Cit.
  3. 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.
  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.
  5. Sandmo, Agnar, 1976. "Optimal taxation : An introduction to the literature," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 37-54.
  6. Ian W. H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," NBER Working Papers 5967, National Bureau of Economic Research, Inc.
  7. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  8. 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.
  9. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental levies and distortionary taxation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152985, Tilburg University.
  10. 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.
  11. 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.
  12. 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.
  13. Bovenberg, A. L. & van der Ploeg, F., 1994. "Environmental policy, public finance and the labour market in a second-best world," Journal of Public Economics, Elsevier, vol. 55(3), pages 349-390, November.
  14. 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.
  15. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  16. 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.
  17. Jorgenson, Dale W. & Wilcoxen, Peter J., 1993. "Reducing US carbon emissions: an econometric general equilibrium assessment," Resource and Energy Economics, Elsevier, vol. 15(1), pages 7-25, March.
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Citations

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Cited by:
  1. 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.
  2. Parry, Ian & Bento, Antonio, 1999. "Tax Deductible Spending, Environmental Policy, and the "Double Dividend" Hypothesis," Discussion Papers dp-99-24, Resources For the Future.
  3. Parry, Ian & Bento, Antonio, 1999. "Revenue Recycling and the Welfare Effects of Road Pricing," Discussion Papers dp-99-45, Resources For the Future.
  4. 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.
  5. O'Ryan, Raúl & de Miguel, Carlos J. & Miller, Sebastian & Munasinghe, Mohan, 2005. "Computable general equilibrium model analysis of economywide cross effects of social and environmental policies in Chile," Ecological Economics, Elsevier, vol. 54(4), pages 447-472, September.
  6. Haucap, Justus & Schwalbe, Ulrich, 2011. "Economic principles of state aid control," DICE Discussion Papers 17, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  7. 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.
  8. Bosquet, Benoit, 2000. "Environmental tax reform: does it work? A survey of the empirical evidence," Ecological Economics, Elsevier, vol. 34(1), pages 19-32, July.

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