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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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    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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