IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwppe/0201004.html
   My bibliography  Save this paper

Optimal Environmental Regulation in the Presence of Other Taxes: A Generalized Second-Best Rule

Author

Listed:
  • Seung-Rae Kim

    (University of Texas at Austin)

Abstract

This paper is intended as a step toward the development of theoretically founded and operational environmental taxation formula in a second-best world. Recent studies find that environmental taxes typically exacerbate pre-existing tax distortions and, therefore, the optimal pollution tax should lie below the Pigouvian level (social marginal damages). Taking account of a non-separable structure of preferences and technology, this paper extends previous models to evaluate the welfare implications of environmental taxes and quotas that apply to polluting intermediate inputs in the presence of other distortionary taxes. Relative to the literature, it also explicitly derives more generalized second-best rules regarding how the presence of prior distortionary taxes affects the optimal configuration of environmental regulation. In this setting, the analysis clarifies that there is no general theoretical presumption for the answer to the question about whether the second-best pollution tax is less than the first-best Pigouvian level. Sharply contrary to the impression given by the prior literature, the answer, surprisingly, does not depend on the degree of pre-existing tax distortions. Moreover, it depends not just on the difference between the two goods' cross-price elasticities with leisure, but on that difference compared to the elasticity of demand for the polluting intermediate input. Finally, the paper shows that under plausible parameter conditions, a greater pre- existing tax distortion can increase the optimal level of environmental regulation.

Suggested Citation

  • Seung-Rae Kim, 2002. "Optimal Environmental Regulation in the Presence of Other Taxes: A Generalized Second-Best Rule," Public Economics 0201004, EconWPA, revised 10 Jul 2002.
  • Handle: RePEc:wpa:wuwppe:0201004
    Note: Type of Document - Acrobat PDF ; Published in "Contributions to Economic Analysis & Policy," Vol.1: No.1, Article 4, In: The B.E. Journals in Economic Analysis & Policy (www.bepress.com); Letter Size ; Pages: 25 ;
    as

    Download full text from publisher

    File URL: http://econwpa.repec.org/eps/pe/papers/0201/0201004.pdf
    Download Restriction: no

    More about this item

    Keywords

    Optimal environmental regulation; Second-best world; Pre-existing tax distortions; Non-separable preferences and technology; Emissions taxes; emissions quota;

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwppe:0201004. 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: (EconWPA). General contact details of provider: http://econwpa.repec.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.