Public expenditures and environmental protection : when is the cost of funds irrelevant?
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.
|Date of creation:||31 Dec 2000|
|Date of revision:|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Vidar Christiansen, 1981. "Evaluation of Public Projects under Optimal Taxation," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 447-457.
- Partha Dasgupta & Joseph Stiglitz, 1972. "On Optimal Taxation and Public Production," Review of Economic Studies, Oxford University Press, vol. 39(1), pages 87-103.
- 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.
- Eskeland, Gunnar S., 2000. "Externalities and production efficiency," Policy Research Working Paper Series 2319, The World Bank.
- 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.
- Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
- Auerbach, Alan J., 1985.
"The theory of excess burden and optimal taxation,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127
- Roberton C. Williams, 2000.
"Environmental Tax Interactions When Pollution Affects Health or Productivity,"
NBER Working Papers
8049, National Bureau of Economic Research, Inc.
- 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.
- Joseph E. Stiglitz & Partha Dasgupta, 1970.
"Differential Taxation, Public Goods, and Economic Efficiency,"
Cowles Foundation Discussion Papers
299, Cowles Foundation for Research in Economics, Yale University.
- J. E. Stiglitz & P. Dasgupta, 1971. "Differential Taxation, Public Goods, and Economic Efficiency," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 151-174.
- 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.
- 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.
- 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.
- Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
- W. J. Corlett & D. C. Hague, 1953. "Complementarity and the Excess Burden of Taxation," Review of Economic Studies, Oxford University Press, vol. 21(1), pages 21-30.
- Eskeland, Gunnar S., 2000. "Environmental protection and optimal taxation," Policy Research Working Paper Series 2510, The World Bank.
- Agnar Sandmo, 1980. "Anomaly and Stability in the Theory of Externalities," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 799-807.
- A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
- 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.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2507. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.