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Subsidizing Non-Polluting Goods vs. Taxing Polluting Goods for Pollution Reduction

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  • Robert Main

Abstract

Pigovian taxes on polluters are politically unpopular, but subsidies for non-polluting sources are politically attractive. This paper presents a linear demand and supply model and numerical example to explore the trade-offs between taxing polluting sources of a good versus subsidizing non-polluting sources of the same good. While the model (along with the associated numerical example) shows the optimality of Pigovian taxes, it also shows how much welfare is reduced if subsidies for nonpolluters are employed instead. Further, it shows the optimal tax, given any level of subsidy and the optimal subsidy, given any level of tax. Copyright International Atlantic Economic Society 2013

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  • Robert Main, 2013. "Subsidizing Non-Polluting Goods vs. Taxing Polluting Goods for Pollution Reduction," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 41(4), pages 349-362, December.
    • Handle: RePEc:kap:atlecj:v:41:y:2013:i:4:p:349-362
    DOI: 10.1007/s11293-013-9370-6
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    1. Ian W.H. Parry, 2002. "A Second-Best Analysis of Environmental Subsidies," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 28, pages 555-572, Edward Elgar Publishing.
    2. Galinato, Gregmar I. & Yoder, Jonathan K., 2010. "An integrated tax-subsidy policy for carbon emission reduction," Resource and Energy Economics, Elsevier, vol. 32(3), pages 310-326, August.
    3. Metcalf, Gilbert E., 2009. "Tax Policies for Low-Carbon Technologies," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(3), pages 519-533, September.
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