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Designing Economic Instruments for the Environment in a Decentralized Fiscal System

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  • James Alm

    ()
    (Department of Economics, Tulane University)

  • H. Spencer Banzhaf

    ()
    (Department of Economics, Andrew Young School of Policy Studies, Georgia State University)

Abstract

When external effects are important, markets will be inefficient, and economists have considered several broad classes of economic instruments to correct these inefficiencies. However, the standard economic analysis has tended to take the region, and the government, as a given; that is, this work has neglected important distinctions and interactions between the geographic scope of different pollutants, the enforcement authority of various levels of government, and the fiscal responsibilities of the various levels of government. It typically ignores the possibility that the externality may be created and addressed by local governments, and it does not consider the implications of decentralization for the design of economic instruments targeted at environmental problems. This paper examines the implications of decentralization for the design of corrective policies; that is, how does one design economic instruments in a decentralized fiscal system in which externalities exist at the local level and in which subnational governments have the power to provide local public services and to choose tax instruments that can both finance these expenditures and correct the market failures of externalities?

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Bibliographic Info

Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1104.

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Length: 54 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:tul:wpaper:1104

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Keywords: market failure; environmental federalism; externalities; fiscal decentralization; subsidiarity principle; economic instruments;

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Cited by:
  1. William M. Shobe & Dallas Burtraw, 2012. "Rethinking Environmental Federalism In A Warming World," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 3(04), pages 1250018-1-1.
  2. Vallés-Giménez, Jaime & Zárate-Marco , Anabel, 2013. "Environmental taxation and industrial water use in Spain," Investigaciones Regionales, Asociación Española de Ciencia Regional, issue 25, pages 133-162.
  3. Millimet, Daniel L., 2013. "Environmental Federalism: A Survey of the Empirical Literature," IZA Discussion Papers 7831, Institute for the Study of Labor (IZA).

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