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Tax Interaction Effects, Environmental Regulation, and “Rule of Thumb” Adjustments to Social Cost

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  • Brian Murray
  • Andrew Keeler
  • Walter Thurman

Abstract

Preexisting distortions in factor markets complicate the estimation of the social welfare effects of regulatory interventions. The existence of these tax interaction effects (TIEs) suggests that general equilibrium (GE) approaches should be used to evaluate regulatory policies. However, formal GE analysis is not always feasible for the numerous environmental regulations proposed by federal, state, and local agencies. The question addressed in this paper is whether an empirically based ‘‘rule of thumb’’ upward adjustment factor is appropriate to properly scale social cost estimates in environmental policy. We argue that such rule of thumb adjustments are significantly less reliable than estimates based on a detailed general equilibrium analysis because of the uncertainty about both the magnitude and sign of the social cost distortion. In addition to addressing this question, the paper gives an overview of TIEs and their relevance to environmental policy. Copyright Springer 2005

Suggested Citation

  • Brian Murray & Andrew Keeler & Walter Thurman, 2005. "Tax Interaction Effects, Environmental Regulation, and “Rule of Thumb” Adjustments to Social Cost," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 30(1), pages 73-92, January.
    • Handle: RePEc:kap:enreec:v:30:y:2005:i:1:p:73-92
    DOI: 10.1007/s10640-004-2379-1
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    References listed on IDEAS

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    1. Jenny Ligthart & Frederick Van Der Ploeg, 1999. "Environmental Policy, Tax Incidence, and the Cost of Public Funds," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 13(2), pages 187-207, March.
    2. Williams III, Roberton C., 1999. "Revisiting the cost of protectionism:: The role of tax distortions in the labor market," Journal of International Economics, Elsevier, vol. 47(2), pages 429-447, April.
    3. Ian W.H. Parry & Antonio M. Bento, 2002. "Tax Deductions, Environmental Policy, and the "Double Dividend" Hypothesis," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 22, pages 397-426, Edward Elgar Publishing.
    4. Nestor, Deborah Vaughn & Pasurka Jr, Carl A, 1995. "CGE model of pollution abatement processes for assessing the economic effects of environmental policy," Economic Modelling, Elsevier, vol. 12(1), pages 53-59, January.
    5. Lawrence H. Goulder & Ian W.H. Parry & Roberton C. Williams III & Dallas Burtraw, 2002. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 27, pages 523-554, Edward Elgar Publishing.
    6. Williams, Roberton III, 2002. "Environmental Tax Interactions when Pollution Affects Health or Productivity," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 261-270, September.
    7. repec:cup:cbooks:9780521296762 is not listed on IDEAS
    8. repec:bla:scandj:v:99:y:1997:i:1:p:45-49 is not listed on IDEAS
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    Cited by:

    1. William Nordhaus, 2014. "Estimates of the Social Cost of Carbon: Concepts and Results from the DICE-2013R Model and Alternative Approaches," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(1), pages 000.
    2. Sturm, Viktoriya, 2011. "Taking into account the emissions from the production and use of mineral fertilizers by imposing a ‘carbon tax’," Conference papers 332047, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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