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Incidence and Environmental Effects of Distortionary Subsidies

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  • Heutel, Garth

    ()
    (University of North Carolina at Greensboro, Department of Economics)

  • Kelly, David L.

    ()
    (University of Miami)

Abstract

Government policies that are not intended to address environmental concerns can nonetheless distort prices and affect firms' emissions. We present an analytical general equilibrium model to study the effect of distortionary subsidies on factor prices and on environmental outcomes. We model an output subsidy, a capital subsidy, relief from environmental regulation, and a direct cash subsidy. In exchange for receiving subsidies, firms must agree to a minimum level of labor employment. Each type of subsidy and the employment constraint create both output effects and substitution effects on input prices and emissions. We calibrate the model to the Chinese economy, where government involvement affects emissions from both state-owned enterprises and private firms. Variation in production substitution elasticities does not substantially affect input prices, but it does substantially affect emissions.

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Bibliographic Info

Paper provided by University of North Carolina at Greensboro, Department of Economics in its series Working Papers with number 13-5.

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Length: 33 pages
Date of creation: 02 Apr 2013
Date of revision:
Handle: RePEc:ris:uncgec:2013_005

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Keywords: Pollution; China; Incidence; Perverse Subsidies;

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  1. Claustre Bajona & David L. Kelly, 2005. "Trade and the Environment with Pre-existing Subsidies: A Dynamic General Equilibrium Analysis," Working Papers, University of Miami, Department of Economics 0603, University of Miami, Department of Economics, revised 01 Mar 2006.
  2. Chang-Tai Hsieh & Peter J Klenow, 2008. "Misallocation and Manufacturing TFP in China and India," 2008 Meeting Papers 121, Society for Economic Dynamics.
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  16. Yin, Xiangkang, 2001. "A dynamic analysis of overstaff in China's state-owned enterprises," Journal of Development Economics, Elsevier, Elsevier, vol. 66(1), pages 87-99, October.
  17. Don Fullerton & Garth Heutel, 2007. "The General Equilibrium Incidence of Environmental Mandates," NBER Working Papers 13645, National Bureau of Economic Research, Inc.
  18. van Beers, Cees & van den Bergh, Jeroen C. J. M., 2001. "Perseverance of perverse subsidies and their impact on trade and environment," Ecological Economics, Elsevier, Elsevier, vol. 36(3), pages 475-486, March.
  19. Wang, Hua & Wheeler, David, 2005. "Financial incentives and endogenous enforcement in China's pollution levy system," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 174-196, January.
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