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The Case for a Two-Part Instrument: Presumptive Tax and Environmental Subsidy

  • Don Fullerton
  • Ann Wolverton

This paper builds two simple general equilibrium models to demonstrate the equivalence between the Pigovian tax and the combination of a presumptive tax and an environmental subsidy. A presumptive tax is a tax that is imposed under the presumption that all production uses a dirty technology or all consumption goods become waste. The environmental subsidy is then provided only to the extent that production uses a cleaner technology or that consumption goods are recycled. To analyze the usefulness of the tax-subsidy combination, we review conceptual considerations regarding its implementation and practical considerations regarding its actual use throughout the world. While the tax-subsidy combination is increasingly being used, in the form of a deposit-refund system, we argue that more flexible interpretations are important to explore. The two parts of such a policy do not have to apply to the same side of the market. The tax and subsidy do not have to equal one another, and they can apply to different goods altogether. Compared to the Pigovian tax, a two-part instrument may be easier to enforce, may be easier to enact, and can still force the market to recognize the social cost of disposal.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5993.

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Date of creation: Apr 1997
Date of revision:
Publication status: published as Environmental and Public Economics: Essays in Honor of Wallace E. Oates, Panagaria, A., P. Portney and R. Schwab, eds., Cheltenham, UK: Edward Elgar, 1999, pp. 32-57.
Handle: RePEc:nbr:nberwo:5993
Note: PE
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  1. Glenn Jenkins & RANJIT LAMECH, 1992. "Market-Based Incentive Instruments For Pollution Control," Development Discussion Papers 1992-02, JDI Executive Programs.
  2. Palmer, Karen & Sigman, Hilary & Walls, Margaret, 1997. "The Cost of Reducing Municipal Solid Waste," Journal of Environmental Economics and Management, Elsevier, vol. 33(2), pages 128-150, June.
  3. Eskeland, Gunnar S, 1994. "A Presumptive Pigovian Tax: Complementing Regulation to Mimic an Emissions Fee," World Bank Economic Review, World Bank Group, vol. 8(3), pages 373-94, September.
  4. Miedema, Allen K., 1983. "Fundamental economic comparisons of solid waste policy options," Resources and Energy, Elsevier, vol. 5(1), pages 21-43, March.
  5. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  6. Dinan Terry M., 1993. "Economic Efficiency Effects of Alternative Policies for Reducing Waste Disposal," Journal of Environmental Economics and Management, Elsevier, vol. 25(3), pages 242-256, November.
  7. Swierzbinski Joseph E., 1994. "Guilty until Proven Innocent-Regulation with Costly and Limited Enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 27(2), pages 127-146, September.
  8. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521311120, October.
  9. Don Fullerton, 1996. "Why Have Separate Environmental Taxes?," NBER Chapters, in: Tax Policy and the Economy, Volume 10, pages 33-70 National Bureau of Economic Research, Inc.
  10. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September.
  11. Porter, Richard C., 1978. "A social benefit-cost analysis of mandatory deposits on beverage containers," Journal of Environmental Economics and Management, Elsevier, vol. 5(4), pages 351-375, December.
  12. Fullerton, Don, 1997. "Environmental Levies and Distortionary Taxes: Comment," American Economic Review, American Economic Association, vol. 87(1), pages 245-51, March.
  13. Hilary A. Sigman, 1995. "A Comparison of Public Policies for Lead Recycling," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 452-478, Autumn.
  14. Richard C. Porter, 1983. "Michigan's Experience with Mandatory Deposits on Beverage Containers," Land Economics, University of Wisconsin Press, vol. 59(2), pages 177-194.
  15. Lee, Dwight R. & Graves, Philip E. & Sexton, Robert L., 1992. "Controlling the abandonment of automobiles: Mandatory deposits vs fines," Journal of Urban Economics, Elsevier, vol. 31(1), pages 14-24, January.
  16. 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.
  17. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, October.
  18. Fullerton Don & Kinnaman Thomas C., 1995. "Garbage, Recycling, and Illicit Burning or Dumping," Journal of Environmental Economics and Management, Elsevier, vol. 29(1), pages 78-91, July.
  19. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, vol. 87(1), pages 252-53, March.
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