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Empirical Estimates for Environmental Policy Making in a Second- Best Setting

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Author Info

  • Sarah E. West

    (Macalester College)

  • Roberton C. Williams III

    (University of Texas at Austin & NBER)

Abstract

This study estimates parameters necessary to calculate the optimal second-best gasoline tax, most notably the cross-price elasticity between gasoline and leisure. Prior work indicates that in a second-best setting with distortionary income taxes, both the cost of environmental regulation and the optimal environmental tax rate depend crucially on the cross-price elasticity between a polluting good and leisure. However, no prior study on second-best environmental regulation has estimated this elasticity. Using household data, we find that gasoline is a relative complement to leisure, and thus that the optimal gasoline tax is significantly higher than marginal damages–the opposite of the result suggested by the prior literature. Following this approach to estimate cross-price elasticities with leisure for other major polluting goods could strongly influence estimates of optimal environmental taxes.

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File URL: http://128.118.178.162/eps/pe/papers/0402/0402005.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Public Economics with number 0402005.

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Length: 36 pages
Date of creation: 16 Feb 2004
Date of revision:
Handle: RePEc:wpa:wuwppe:0402005

Note: Type of Document - pdf; pages: 36; figures: none
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Web page: http://128.118.178.162

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Keywords: second-best environmental taxes; optimal taxes; tax interactions; demand system;

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References

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Citations

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Cited by:
  1. Parry, Ian W.H., 2006. "Are the Costs of Reducing Greenhouse Gases from Passenger Vehicles Negative?," Discussion Papers dp-06-14-rev, Resources For the Future.
  2. Katri Kosonen & Gaetan Nicodeme, 2009. "The role of fiscal instruments in environmental policy," Taxation Papers 19, Directorate General Taxation and Customs Union, European Commission.
  3. Claudio Agostini, 2010. "Efectos del Diferencial de Impuestos a las Gasolinas en la Demanda de Automóviles," ILADES-Georgetown University Working Papers inv243, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  4. Park, Sung Y. & Zhao, Guochang, 2010. "An estimation of U.S. gasoline demand: A smooth time-varying cointegration approach," Energy Economics, Elsevier, vol. 32(1), pages 110-120, January.
  5. Sofronis Clerides & Theodoros Zachariadis, 2006. "Are standards Effective in Improving Automobile Fuel Economy?," University of Cyprus Working Papers in Economics 6-2006, University of Cyprus Department of Economics.
  6. Sarah E. West & Roberton C. Williams III, 2002. "Estimates from a Consumer Demand System: Implications for the Incidence of Environmental Taxes," NBER Working Papers 9152, National Bureau of Economic Research, Inc.
  7. Don Fullerton & Ann Wolverton, 2003. "The Two-Part Instrument in a Second-Best World," NBER Working Papers 10140, National Bureau of Economic Research, Inc.
  8. repec:hal:journl:halshs-00194917 is not listed on IDEAS
  9. Sarah E. West & Roberton C. Williams III, 2005. "The Cost of Reducing Gasoline Consumption," American Economic Review, American Economic Association, vol. 95(2), pages 294-299, May.
  10. Eban Goodstein, 2003. "The Death of the Pigovian Tax? Policy Implications from the Double-Dividend Debate," Land Economics, University of Wisconsin Press, vol. 79(3), pages 402-414.
  11. Parry, Ian, 2005. "Should Fuel Taxes Be Scrapped in Favor of Per-Mile Charges?," Discussion Papers dp-05-36, Resources For the Future.
  12. Jean-Christophe Caffet, 2005. "Health effects and optimal environmental taxes in welfare state countries," Cahiers de la Maison des Sciences Economiques v05049, Université Panthéon-Sorbonne (Paris 1).
  13. Burtraw, Dallas & Pizer, William & Harrington, Winston & Sanchirico, James & Newell, Richard, 2005. "Modeling Economywide versus Sectoral Climate Policies Using Combined Aggregate-Sectoral Models," Discussion Papers dp-05-08, Resources For the Future.
  14. Louis Kaplow, 2006. "Optimal Control of Externalities in the Presence of Income Taxation," NBER Working Papers 12339, National Bureau of Economic Research, Inc.

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