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Direct versus Indirect Remedies for Externalities

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  • Green, Jerry
  • Sheshinski, Eytan

Abstract

This paper is concerned with tax policies designed to obtain an improved competitive allocation in the presence of consumption externalities. It is known that the full optimum can, in general, be attained only through the imposition of excise taxes at different levels for different individuals. Since these may be ruled out (possibly because of implementation costs), one is confined to consider second-best taxes. The common interpretation of the Pigouvian principle has called for taxes on the externality-creating commodities. With no relationships between the consumption of different commodities the Pigouvian principle is obviously impeccable. But the existence of substitutes or complements for an externality-causing commodity raises the possibility of indirect policies: treating the externality through the markets for related goods. Obviously, if the direct policy is not feasible, the indirect treatment may provide some partial remedy. We show, however, that even when direct policies are available, the overall optimum may involve only indirect policies. An example with such a result is provided in the paper. We also list a number of cases in which the traditional prescription is confirmed, and the overall optimum involves only direct policies.
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Suggested Citation

  • 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.
  • Handle: RePEc:ucp:jpolec:v:84:y:1976:i:4:p:797-808
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    References listed on IDEAS

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    1. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-322, June.
    2. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
    3. Otto A. Davis & Andrew Whinston, 1962. "Externalities, Welfare, and the Theory of Games," Journal of Political Economy, University of Chicago Press, vol. 70, pages 241-241.
    4. Peter A. Diamond, 1973. "Consumption Externalities and Imperfect Corrective Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 526-538, Autumn.
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    Cited by:

    1. Wojciech Kopczuk, 2012. "Taxation of Intergenerational Transfers and Wealth," NBER Working Papers 18584, National Bureau of Economic Research, Inc.
    2. Slivko, Olga, 2012. "Direct and indirect subsidies in markets with system goods in the presence of externalities. Preliminary version," Working Papers 2072/211631, Universitat Rovira i Virgili, Department of Economics.
    3. Vidar Christiansen & Stephen Smith, 2012. "Externality-Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 358-383, June.
    4. Fullerton, Don & Wolverton, Ann, 2005. "The two-part instrument in a second-best world," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1961-1975, September.
    5. Martin Altemeyer-Bartscher & Dirk T. G. Rübbelke & Eytan Sheshinski, 2007. "Policies to Internalize Reciprocal International Spillovers," CESifo Working Paper Series 2058, CESifo Group Munich.
    6. Jaime Sempere, 2000. "Optimal Tax Rules, Pigou Taxation, and the “Double Dividend”," Economía Mexicana NUEVA ÉPOCA, , vol. 0(1), pages 93-103, January-J.
    7. Gerard Russo, 1989. "Moral Hazard and Optimal Cigarette Taxation," Working Papers 198918, University of Hawaii at Manoa, Department of Economics.
    8. Eckerstorfer, Paul & Wendner, Ronald, 2013. "Asymmetric and non-atmospheric consumption externalities, and efficient consumption taxation," Journal of Public Economics, Elsevier, vol. 106(C), pages 42-56.
    9. Ashish Goel & Adam Meyerson & Thomas Weber, 2009. "Fair welfare maximization," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 41(3), pages 465-494, December.
    10. Sheshinski, Eytan, 2004. "On atmosphere externality and corrective taxes," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 727-734, March.
    11. König, Tobias & Lausen, Tobias, 2016. "Relative consumption preferences and public provision of private goods," Discussion Papers, Research Unit: Market Behavior SP II 2016-213, Social Science Research Center Berlin (WZB).
    12. Geir H. Bjertnæs & Taran Fæhn & Jørgen Aasness, 2008. "Designing an electricity tax system in presence of international regulations and multiple public goals: An empirical assessment," Discussion Papers 555, Statistics Norway, Research Department.
    13. Eskeland, Gunnar S., 2000. "Externalities and production efficiency," Policy Research Working Paper Series 2319, The World Bank.
    14. Bjertnæs, Geir H. & Fæhn, Taran & Aasness, Jørgen, 2008. "Designing an electricity tax system in presence of international regulations and multiple public goals: An empirical assessment," Energy Policy, Elsevier, vol. 36(10), pages 3723-3733, October.
    15. Martin Altemeyer-Bartscher & Dirk T. G. Rübbelke & Eytan Sheshinski, 2010. "Environmental Protection and the Private Provision of International Public Goods," Economica, London School of Economics and Political Science, vol. 77(308), pages 775-784, October.
    16. Levinson, Arik & Shetty, Sudhir, 1992. "Los Angeles, Mexico City, Cubatao, and Ankara - Efficient environmental regulation : case studies of urban air pollution," Policy Research Working Paper Series 942, The World Bank.
    17. Gareth Myles, 2000. "Taxation and economic growth," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 141-168, March.
    18. König, Tobias & Lausen, Tobias, 2017. "Relative Consumption Preferences and Public Provision of Private Goods," Rationality and Competition Discussion Paper Series 18, CRC TRR 190 Rationality and Competition.
    19. Rübbelke Dirk T.G. & Sheshinski Eytan, 2005. "Transfers as a Means to Combat European Spillovers," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 225(6), pages 699-710, December.
    20. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
    21. Kopczuk, Wojciech, 2003. "A note on optimal taxation in the presence of externalities," Economics Letters, Elsevier, vol. 80(1), pages 81-86, July.

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