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Public expenditures and environmental protection : when is the cost of funds irrelevant?

  • Eskeland, Gunnar S.

Assume that a public program -- whether in the form of public expenditures or regulation of private activities -- provides not only a public good to consumers but also a collective input (say, a less polluted water source for brewers, or better roads for their trucks). In a contextof optimal taxation and constant returns to scale, the author shows that only the direct benefits to consumers in the form of a public good are adjusted by the shadow price of public revenue (typically downward, as Pigou conjectured) before benefits are aggregated to establish optimal provision. When public programs benefit productive sectors through cost savings, the marginal cost of provision is in optimum equal to the marginal cost savings in the benefiting sectors. The reason that programs that benefit production are not scaled down by the shadow price of public revenue is that the benefits are derived from markets that are otherwise taxable. Government can capture those cost savings at no distortionary cost by increasing the tax rates for each good, to match the cost savings provided. In practice, do public programs to protect the environment benefit mostly consumers or mostly producers? The author suggests that environmental protection has direct value for consumers and indirect value, as inputs, for producers. In the case of programs to reduce emissions of global greenhouse gases, for instance, most of the benefits appear to be in agriculture, a productive sector. Public programs in general provide a combination of public and private benefits: the share of commercial vehicles on roads is typically high in poor countries. In related papers,"Externalities and Production Efficiency"(Policy Research Working Paper 2319) and"Environmental Protection and Optimal Taxation"(Policy Research Working Paper 2510), the author shows that under optimal taxation, marginal abatement costs should be the same for polluting government, polluting producers, and polluting consumers, rich and poor.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2507.

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Date of creation: 31 Dec 2000
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Handle: RePEc:wbk:wbrwps:2507
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  1. Eskeland, Gunnar S., 2000. "Environmental protection and optimal taxation," Policy Research Working Paper Series 2510, The World Bank.
  2. Bovenberg, A.L. & de Mooij, R.A., 1994. "Environmental levies and distortionary taxation," Other publications TiSEM 4b32deaa-ec2f-4de7-b59b-9, Tilburg University, School of Economics and Management.
  3. repec:oup:restud:v:39:y:1972:i:1:p:87-103 is not listed on IDEAS
  4. King, Mervyn A., 1986. "A pigovian rule for the optimum provision of public goods," Journal of Public Economics, Elsevier, vol. 30(3), pages 273-291, August.
  5. repec:oup:qjecon:v:94:y:1980:i:4:p:799-807 is not listed on IDEAS
  6. Bovenberg, A Lans & van der Ploeg, Frederick, 1994. " Green Policies and Public Finance in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(3), pages 343-63.
  7. Sandmo, Agnar, 1972. "Optimality rules for the provision of collective factors of production," Journal of Public Economics, Elsevier, vol. 1(1), pages 149-157, April.
  8. repec:oup:restud:v:38:y:1971:i:114:p:151-74 is not listed on IDEAS
  9. Alan J. Auerbach, 1982. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc.
  10. repec:oup:restud:v:41:y:1974:i:1:p:119-28 is not listed on IDEAS
  11. Eskeland, Gunnar S., 2000. "Externalities and production efficiency," Policy Research Working Paper Series 2319, The World Bank.
  12. Williams, Roberton III, 2002. "Environmental Tax Interactions when Pollution Affects Health or Productivity," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 261-270, September.
  13. Oakland, William H., 1987. "Theory of public goods," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 9, pages 485-535 Elsevier.
  14. Feldstein, Martin S, 1972. "Distributional Equity and the Optimal Structure of Public Prices," American Economic Review, American Economic Association, vol. 62(1), pages 32-36, March.
  15. repec:oup:restud:v:48:y:1981:i:3:p:447-57 is not listed on IDEAS
  16. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Mendelsohn, Robert & Nordhaus, William D & Shaw, Daigee, 1994. "The Impact of Global Warming on Agriculture: A Ricardian Analysis," American Economic Review, American Economic Association, vol. 84(4), pages 753-71, September.
  18. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
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