IDEAS home Printed from https://ideas.repec.org/p/hrv/faseco/3204666.html
   My bibliography  Save this paper

Direct Versus Indirect Remedies for Externalities

Author

Listed:
  • Sheshinski, Eytan
  • Green, Jerry

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.

Suggested Citation

  • Sheshinski, Eytan & Green, Jerry, 1976. "Direct Versus Indirect Remedies for Externalities," Scholarly Articles 3204666, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:3204666
    as

    Download full text from publisher

    File URL: http://dash.harvard.edu/bitstream/handle/1/3204666/green_directversus.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Otto A. Davis & Andrew Whinston, 1962. "Externalities, Welfare, and the Theory of Games," Journal of Political Economy, University of Chicago Press, vol. 70(3), pages 241-241.
    2. Peter A. Diamond, 1973. "Consumption Externalities and Imperfect Corrective Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(2), pages 526-538, Autumn.
    3. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-322, June.
    4. Peter A. Diamond & James A. Mirrlees, 1973. "Aggregate Production with Consumption Externalities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(1), pages 1-24.
    5. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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, 2009. "Externality-correcting Taxes and Regulation," CESifo Working Paper Series 2793, CESifo.
    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.
    6. Gui, Benedetto & de Villemeur, Étienne, 2007. "Regulation of a Monopoly Generating Externalities," IDEI Working Papers 469, Institut d'Économie Industrielle (IDEI), Toulouse, revised Jan 2011.
    7. Jaime Sempere, 2000. "Optimal Tax Rules, Pigou Taxation, and the “Double Dividend”," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(1), pages 93-103, January-J.
    8. Daniel Jaqua & Daniel Schaffa, 2022. "The case for subsidizing harm: constrained and costly Pigouvian taxation with multiple externalities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(2), pages 408-442, April.
    9. Gerard Russo, 1989. "Moral Hazard and Optimal Cigarette Taxation," Working Papers 198918, University of Hawaii at Manoa, Department of Economics.
    10. 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.
    11. 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.
    12. Sheshinski, Eytan, 2004. "On atmosphere externality and corrective taxes," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 727-734, March.
    13. Eduardo Dávila & Ansgar Walther, 2021. "Corrective Regulation with Imperfect Instruments," NBER Working Papers 29160, National Bureau of Economic Research, Inc.
    14. König, Tobias & Lausen, Tobias, 2016. "Relative consumption preferences and public provision of private goods," Discussion Papers, Research Unit: Market Behavior SP II 2016-213, WZB Berlin Social Science Center.
    15. Eichner, Thomas & Pethig, Rüdiger, 2022. "Kantians defy the economists’ mantra of uniform Pigovian emissions taxes," Ecological Economics, Elsevier, vol. 200(C).
    16. 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.
    17. Eskeland, Gunnar S., 2000. "Externalities and production efficiency," Policy Research Working Paper Series 2319, The World Bank.
    18. 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.
    19. 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.
    20. 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.
    21. Gareth Myles, 2000. "Taxation and economic growth," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 141-168, March.
    22. 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.
    23. Vidar Christiansen & Stephen Smith, 2012. "Externality‐Correcting Taxes and Regulation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 358-383, June.
    24. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
    25. Kopczuk, Wojciech, 2003. "A note on optimal taxation in the presence of externalities," Economics Letters, Elsevier, vol. 80(1), pages 81-86, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ko, Il-Dong, 1988. "Issues in the control of stock externality problems with inflexible policy measures," ISU General Staff Papers 198801010800009859, Iowa State University, Department of Economics.
    2. Laffont, Jean-Jacques, 1975. "Note historique sur les effets externes," L'Actualité Economique, Société Canadienne de Science Economique, vol. 51(3), pages 420-433, juillet.
    3. Dieter Schmidtchen & Jenny Helstroffer & Christian Koboldt, 2021. "Regulatory failure and the polluter pays principle: why regulatory impact assessment dominates the polluter pays principle," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 23(1), pages 109-144, January.
    4. Heider, Florian & Inderst, Roman, 2021. "A Corporate Finance Perspective on Environmental Policy," EconStor Preprints 253669, ZBW - Leibniz Information Centre for Economics.
    5. Fu, Ke & Li, Yanzhi & Mao, Huiqiang & Miao, Zhaowei, 2023. "Firms’ production and green technology strategies: The role of emission asymmetry and carbon taxes," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1100-1112.
    6. Dieter Schmidtchen & Jenny Helstroffer & Christian Koboldt, 2015. "Replacing the Polluter Pays Principle by the Cheapest Cost Avoider Principle: On the Efficient Treatment of External Costs," Working Papers of BETA 2015-08, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    7. Adam Gifford Jr. & Courtenay C. Stone, 1973. "Externalities, Liability And The Coase Theorem:A Mathematical Analysis," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 260-269, September.
    8. Fisher, Anthony C & Peterson, Frederick M, 1976. "The Environment in Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 14(1), pages 1-33, March.
    9. Juan Carlos Bárcena‐Ruiz & María Begoña Garzón, 2022. "Environmental policy instruments and ownership of firms," Manchester School, University of Manchester, vol. 90(4), pages 385-408, July.
    10. Laffer, Arthur B. (Лаффер, Артур), 2016. "Handbook of Tobacco Taxation: Theory and Practice (Economic Theory of Taxation) [Руководство По Налогообложению Табачных Изделий: Теория И Практика (Экономическая Теория Налогообложения)]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 50-67, October.
    11. Randall G. Holcombe & Roger E. Meiners, 1980. "Corrective Taxes and Auctions of Rights in the Control of Externalities," Public Finance Review, , vol. 8(3), pages 345-349, July.
    12. Koon-Lam Shea, 1978. "Coase theorem, liability rules and social optimum," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 114(3), pages 540-551, September.
    13. Verhoef, Erik T. & Nijkamp, Peter, 1999. "Second-best energy policies for heterogeneous firms," Energy Economics, Elsevier, vol. 21(2), pages 111-134, April.
    14. MAHENC Philippe, 2006. "Lemons are Green: The Informative Role of a Pigovian Tax," LERNA Working Papers 06.05.198, LERNA, University of Toulouse.
    15. O'Connell, Martin & Smith, Kate, 2020. "Corrective Tax Design and Market Power," CEPR Discussion Papers 14582, C.E.P.R. Discussion Papers.
    16. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.
    17. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    18. Richard S. J. Tol, 2021. "Selfish Bureaucrats And Policy Heterogeneity In Nordhaus’ Dice," World Scientific Book Chapters, in: Robert Mendelsohn (ed.), CLIMATE CHANGE ECONOMICS Commemoration of Nobel Prize for William Nordhaus, chapter 6, pages 77-92, World Scientific Publishing Co. Pte. Ltd..
    19. Steven G. Medema, 2020. "The Coase Theorem at Sixty," Journal of Economic Literature, American Economic Association, vol. 58(4), pages 1045-1128, December.
    20. Kohn, Robert E., 1997. "The effect of emission taxes and abatement subsidies on market structure: Comment," International Journal of Industrial Organization, Elsevier, vol. 15(5), pages 617-628, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hrv:faseco:3204666. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Office for Scholarly Communication (email available below). General contact details of provider: https://edirc.repec.org/data/deharus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.