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The Welfare Impact of Second-Best Uniform-Pigouvian Taxation: Evidence from Transportation

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  • Christopher R. Knittel
  • Ryan Sandler

Abstract

When consumers or firms don't face the true social cost of their actions, market outcomes are inefficient. In the case of negative externalities, Pigouvian taxes are one way to correct this market failure, but it may be infeasible to tax the externality directly. The alternative, taxing a related product, will be second-best. In this paper, we show that in the presence of heterogeneous externalities and elasticities, this type of indirect tax performs poorly. In our empirical application, gasoline taxes to address pollution externalities, less than a third of the deadweight loss of the externality is addressed by second-best optimal taxes.

Suggested Citation

  • Christopher R. Knittel & Ryan Sandler, 2018. "The Welfare Impact of Second-Best Uniform-Pigouvian Taxation: Evidence from Transportation," American Economic Journal: Economic Policy, American Economic Association, vol. 10(4), pages 211-242, November.
    • Handle: RePEc:aea:aejpol:v:10:y:2018:i:4:p:211-42
    Note: DOI: 10.1257/pol.20160508
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    Citations

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    Cited by:

    1. Nano Barahona & Francisco A Gallego & Juan-Pablo Montero, 2020. "Vintage-Specific Driving Restrictions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(4), pages 1646-1682.
    2. Christopher R. Knittel & Shinsuke Tanaka, 2019. "Driving Behavior and the Price of Gasoline: Evidence from Fueling-Level Micro Data," NBER Working Papers 26488, National Bureau of Economic Research, Inc.
    3. Inge van den Bijgaart & David Klenert & Linus Mattauch & Simona Sulikova, 2024. "Healthy climate, healthy bodies: Optimal fuel taxation and physical activity," Economica, London School of Economics and Political Science, vol. 91(361), pages 93-122, January.
    4. Yasser Ammar AL-Rawi & Mohammed Harith Imlus & Yusri Yusup & Sofri Bin Yahya, 2018. "The Optimal Progressive Tax Policy to Reduced Vehicles Externalities," Journal of Asian Scientific Research, Asian Economic and Social Society, vol. 8(8), pages 265-276, August.
    5. Antonio M. Bento & Mark R. Jacobsen & Christopher R. Knittel & Arthur A. van Benthem, 2020. "Estimating the Costs and Benefits of Fuel-Economy Standards," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 1(1), pages 129-157.
    6. Mark R Jacobsen & James M Sallee & Joseph S Shapiro & Arthur A van Benthem, 2023. "Regulating Untaxable Externalities: Are Vehicle Air Pollution Standards Effective and Efficient?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(3), pages 1907-1976.
    7. Jinwon Kim & Jucheol Moon & Dongyun Yang, 2024. "Pigouvian Congestion Tolls and the Welfare Gain: Estimates for California Freeways," Working Papers 2402, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    8. Stéphane Gauthier & Fanny Henriet, 2023. "Targeting Taxes on Local Externalities," Annals of Economics and Statistics, GENES, issue 151, pages 1-36.
    9. Donna, Javier D., 2018. "Measuring Long-Run Price Elasticities in Urban Travel Demand," MPRA Paper 90059, University Library of Munich, Germany.
    10. Michael Pollitt & Geoffroy Dolphin, 2021. "Should the EU ETS be extended to road transport and heating fuels?," Working Papers EPRG2119, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    11. Javier D. Donna, 2021. "Measuring long‐run gasoline price elasticities in urban travel demand," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 945-994, December.
    12. Eichner, Thomas & Pethig, Rüdiger, 2022. "Kantians defy the economists’ mantra of uniform Pigovian emissions taxes," Ecological Economics, Elsevier, vol. 200(C).
    13. Gillingham, Kenneth & Munk-Nielsen, Anders, 2019. "A tale of two tails: Commuting and the fuel price response in driving," Journal of Urban Economics, Elsevier, vol. 109(C), pages 27-40.
    14. Taiebat, Morteza & Stolper, Samuel & Xu, Ming, 2019. "Forecasting the Impact of Connected and Automated Vehicles on Energy Use: A Microeconomic Study of Induced Travel and Energy Rebound," Applied Energy, Elsevier, vol. 247(C), pages 297-308.
    15. Tarduno, Matthew, 2021. "The congestion costs of Uber and Lyft," Journal of Urban Economics, Elsevier, vol. 122(C).
    16. Matsushima, Hiroshi & Khanna, Madhu, 2022. "Estimating Medium-run Direct Rebound Effects of the Footprint-based CAFE Standard," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322420, Agricultural and Applied Economics Association.
    17. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.
    18. Eirik S. Amundsen & Lars Gårn Hansen & Hans Jørgen Whitta-Jacobsen, 2022. "Regulation of Location-Specific Externalities from Small-Scale Polluters," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(3), pages 507-528, July.
    19. Knittel, Christopher R. & Tanaka, Shinsuke, 2021. "Fuel economy and the price of gasoline: Evidence from fueling-level micro data," Journal of Public Economics, Elsevier, vol. 202(C).
    20. Taiebat, Morteza & Stolper, Samuel & Xu, Ming, 2019. "Forecasting the Impact of Connected and Automated Vehicles on Energy Use: A Microeconomic Study of Induced Travel and Energy Rebound," LawArXiv dk6qv, Center for Open Science.
    21. Langford, Richard P. & Gillingham, Kenneth, 2023. "Quantifying the benefits of the introduction of the hybrid electric vehicle," International Journal of Industrial Organization, Elsevier, vol. 87(C).
    22. Basso, Leonardo J. & Montero, Juan-Pablo & Sepúlveda, Felipe, 2021. "A practical approach for curbing congestion and air pollution: Driving restrictions with toll and vintage exemptions," Transportation Research Part A: Policy and Practice, Elsevier, vol. 148(C), pages 330-352.
    23. Morteza Taiebat & Samuel Stolper & Ming Xu, 2019. "Forecasting the Impact of Connected and Automated Vehicles on Energy Use A Microeconomic Study of Induced Travel and Energy Rebound," Papers 1902.00382, arXiv.org, revised May 2019.
    24. Paul Calcott & Vladimir Petkov, 2023. "Choosing between imperfect proxies for a corrective tax," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(2), pages 245-275, April.
    25. Minetti, Raoul & Peng, Tao & Jiang, Tao, 2019. "Keeping up with the Zhangs and house price dynamics in China," Journal of Economic Dynamics and Control, Elsevier, vol. 109(C).

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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