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On the Superiority of Corrective Taxes to Quantity Regulation

  • Louis Kaplow
  • Steven Shavell

The traditional view of economists has been that corrective taxes are superior to direct" regulation of harmful externalities when the state's information about control costs is incomplete. " In recent years, however, many economists seem to have adopted the view that either corrective" taxes or quantity regulation could be superior to the other. One argument for this view with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax" schedule) even when harm is nonlinear. Corrective taxes are indeed superior to quantity" regulation if -- as seems more plausible -- the state can impose a nonlinear tax equal to the" schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm. " Another argument, associated with Baumol and Oates (1988), is that quantity regulation gains" appeal when the state is uncertain about the harm caused by an externality. In this case however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity" regulation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6251.

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Date of creation: Nov 1997
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Publication status: published as Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 1-17, January.
Handle: RePEc:nbr:nberwo:6251
Note: PE
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  1. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  2. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Mendelsohn, Robert, 1984. "Endogenous technical change and environmental regulation," Journal of Environmental Economics and Management, Elsevier, vol. 11(3), pages 202-207, September.
  4. Karp, Gordon & Yohe, Gary W., 1979. "The optimal linear alternative to price and quantity controls in the multifirm case," Journal of Comparative Economics, Elsevier, vol. 3(1), pages 56-65, March.
  5. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September.
  6. Susan Rose-Ackerman, 1973. "Effluent Charges: A Critique," Canadian Journal of Economics, Canadian Economics Association, vol. 6(4), pages 512-28, November.
  7. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and environmental innovation," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 127-140, October.
  8. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 595-601, October.
  9. Dasgupta, Partha & Hammond, Peter & Maskin, Eric, 1980. "On Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 47(5), pages 857-60, October.
  10. Adar, Zvi & Griffin, James M., 1976. "Uncertainty and the choice of pollution control instruments," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 178-188, October.
  11. 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.
  12. Morgan, Peter J., 1983. "Alternative policy instruments under uncertainty: A programming model of toxic pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 10(3), pages 248-269, September.
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  14. Stavins, Robert & Keohane, Nathaniel & Revesz, Richard, 1997. "The Positive Political Economy of Instrument Choice in Environmental Policy," Discussion Papers dp-97-25, Resources For the Future.
  15. Robert A. Collinge & Wallace E. Oates, 1982. "Efficiency in Pollution Control in the Short and Long Runs: A System of Rental Emission Permits," Canadian Journal of Economics, Canadian Economics Association, vol. 15(2), pages 347-54, May.
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  17. Fishelson, Gideon, 1976. "Emission control policies under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 189-197, October.
  18. Bohm, Peter & Russell, Clifford S., 1985. "Comparative analysis of alternative policy instruments," Handbook of Natural Resource and Energy Economics, in: A. V. Kneeseā€  & J. L. Sweeney (ed.), Handbook of Natural Resource and Energy Economics, edition 1, volume 1, chapter 10, pages 395-460 Elsevier.
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  20. Butler, Richard V & Maher, Michael D, 1982. "The Control of Externalities in a Growing Urban Economy," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 155-63, January.
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