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A presumptive pigovian tax on gasoline : analysis of an air pollution control program for Mexico City

  • Eskeland, Gunnar S.

Without continuous monitoring of emissions, a pollution control agency needs to evaluate abatement options itself. Apart from making activities cleaner, it should also stimulate reductions in the level of activity in polluting sectors. The author develops an analytical framework to show that a tax on a variable input, such as gasoline, is useful for this purpose. It encourages individuals and firms to sacrifice trips when they would prefer those sacrifices to those of higher spending on abatement. The instrument exploits privately held information about which trips can be saved at a low social cost. Other weaknesses of a program based on indirect instruments - as opposed to one induced by a theoretically conceived pollution tax - remain. One of these is that the agency may have poorer information than individuals and firms about the status of vehicles and the effectiveness of individual abatement options. Such an information gap - which could be bridged by a true pollution tax - is abstracted from the analysis. The author shows that the tax rate that belongs in a cost-effective pollution control program is independent of the price elasticity of demand for the polluting good. But the higher the demand elasticity, the higher are the costs of not including a presumptive tax on the polluting good in the tool kit of the pollution control agency. The author estimates the cost savings available when an optimal gasoline tax is included in an otherwise well-composed program, appropriately accounting for the welfare costs ofdemand consumption. He shows that the targeted emission reductions can be obtained at 11 percent lower costs, saving $64 million annually, when the demand conservation induced by the gasoline tax allows some other, more expensive abatement options to remain unused. He proposes an ad valorem gasoline tax of about 25 percent, when no separate value is associated with the collection of revenue or with avoidance of noise, congestion, accidents, and road damage. In Mexico City alone, the tax would collect $350 million a year. After recent price increases, implicit tax rates in Mexico City are higher than suggested by the author's analysis. Higher rates may or may not be justified due to the benefits of demand conservation not accounted for in the analysis.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1076.

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Date of creation: 31 Jan 1993
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Handle: RePEc:wbk:wbrwps:1076
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  1. Joseph Farrell., 1987. "Information and the Coase Theorem," Economics Working Papers 8747, University of California at Berkeley.
  2. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  3. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
  4. Berndt, Ernst R. & Botero, German, 1985. "Energy demand in the transportation sector of Mexico," Journal of Development Economics, Elsevier, vol. 17(3), pages 219-238, April.
  5. 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.
  6. Balcer, Yves, 1980. "Taxation of externalities: Direct versus Indirect," Journal of Public Economics, Elsevier, vol. 13(1), pages 121-129, February.
  7. Dale W. Jorgenson & Peter J. Wilcoxen, 1990. "Environmental Regulation and U.S. Economic Growth," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 314-340, Summer.
  8. Robert S. Pindyck, 1979. "The Structure of World Energy Demand," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661772, June.
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