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Externality-Correcting Taxes and Regulation

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  • Vidar Christiansen
  • Stephen Smith

Abstract

Much of the literature on externalities has considered taxes and direct regulation as alternative policy instruments. Both instruments may in practice be imperfect, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider cases where taxes are either imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases we characterise the optimal instrument mix, and show how changing the level of direct regulation alters the optimal externality tax.
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Suggested Citation

  • Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 358-383, June.
  • Handle: RePEc:bla:scandj:v:114:y:2012:i:2:p:358-383 DOI: j.1467-9442.2012.01701.x
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    References listed on IDEAS

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    1. W. J. Corlett & D. C. Hague, 1953. "Complementarity and the Excess Burden of Taxation," Review of Economic Studies, Oxford University Press, vol. 21(1), pages 21-30.
    2. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, pages 55-75.
    3. Eskeland, Gunnar S, 1994. "A Presumptive Pigovian Tax: Complementing Regulation to Mimic an Emissions Fee," World Bank Economic Review, World Bank Group, vol. 8(3), pages 373-394, September.
    4. Hoel, Michael, 1998. " Emission Taxes versus Other Environmental Policies," Scandinavian Journal of Economics, Wiley Blackwell, pages 79-104.
    5. Wijkander, Hans, 1985. "Correcting externalities through taxes on/subsidies to related goods," Journal of Public Economics, Elsevier, pages 111-125.
    6. Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545 Elsevier.
    7. Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, pages 358-383.
    8. Green, Jerry & Sheshinski, Eytan, 1976. "Direct versus Indirect Remedies for Externalities," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 797-808, August.
    9. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, pages 195-220.
    10. Hoel, Michael, 2011. "Environmental R&D," Memorandum 12/2010, Oslo University, Department of Economics.
    11. Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, pages 358-383.
    12. Innes, Robert, 1996. "Regulating Automobile Pollution under Certainty, Competition, and Imperfect Information," Journal of Environmental Economics and Management, Elsevier, vol. 31(2), pages 219-239, September.
    13. Don Fullerton & Ann Wolverton, 1997. "The Case for a Two-Part Instrument: Presumptive Tax and Environmental Subsidy," NBER Working Papers 5993, National Bureau of Economic Research, Inc.
    14. Balcer, Yves, 1980. "Taxation of externalities: Direct versus Indirect," Journal of Public Economics, Elsevier, pages 121-129.
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    Cited by:

    1. Rebecca L. Taylor & Sofia B. Villas-Boas, 2016. "Bans vs. Fees: Disposable Carryout Bag Policies and Bag Usage," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, pages 351-372.
    2. Markus Haavio and Kaisa Kotakorpi, 2012. "Sin Licenses Revisited," Discussion Papers 75, Aboa Centre for Economics.
    3. Michael Keen, 2011. "The Taxation and Regulation of Banks," IMF Working Papers 11/206, International Monetary Fund.
    4. Louis Kaplow, 2017. "Optimal Regulation with Exemptions," NBER Working Papers 23887, National Bureau of Economic Research, Inc.
    5. Elaine Kelly, 2011. "The Scourge of Asian Flu: In utero Exposure to Pandemic Influenza and the Development of a Cohort of British Children," Journal of Human Resources, University of Wisconsin Press, pages 669-694.
    6. Richard M. Bird & Sally Wallace, 2010. "Taxing Alcohol In Africa: Reflections And Updates," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1031, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. Taylor, Rebecca & Villas-Boas, Sofia B., 2015. "Bans versus Fees: Disposable Carryout Bag Policies and Bag Usage," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 204783, Agricultural and Applied Economics Association;Western Agricultural Economics Association.
    8. Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, pages 358-383.
    9. Bird,Richard M., 2015. "Tobacco and alcohol excise taxes for improving public health and revenue outcomes : marrying sin and virtue ?," Policy Research Working Paper Series 7500, The World Bank.
    10. Vidar Christiansen & Stephen Smith, 2015. "Emissions Taxes and Abatement Regulation Under Uncertainty," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, pages 17-35.
    11. Antimiani, Alessandro & Costantini, Valeria & Kuik, Onno & Paglialunga, Elena, 2016. "Mitigation of adverse effects on competitiveness and leakage of unilateral EU climate policy: An assessment of policy instruments," Ecological Economics, Elsevier, vol. 128(C), pages 246-259.
    12. Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, pages 358-383.
    13. Shackelford, Douglas A. & Shaviro, Daniel N. & Slemrod, Joel, 2010. "Taxation and the Financial Sector," National Tax Journal, National Tax Association, pages 781-806.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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