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Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution

Author

Listed:
  • Marsiliani, L.
  • Renstrom, T.

Abstract

Tax earmarking imposes a constraint on government policymaking, and may be desirable if it solves a time-inconsistency problem in tax policy. In a two-period economy, in which the policy decisions regarding taxes, public goods provision, and pollution abatement are taken by a majority-elected individual, we show how the time-inconsistency problem in environmental policy arises. We demonstrate that the commitment equilibrium under no earmarking rules cannot be as fully implemented as a no-commitment equilibrium under earmarking rules. However, the earmarking rules do act as a partial commitment mechanism.

Suggested Citation

  • Marsiliani, L. & Renstrom, T., 1999. "Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution," Discussion Papers 99-22, Department of Economics, University of Birmingham.
  • Handle: RePEc:bir:birmec:99-22
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    References listed on IDEAS

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    More about this item

    Keywords

    FISCAL POLICY ; TAXATION ; SOCIAL CHOICE ; ENVIRONMENT;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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