Pollution control in a Cournot duopoly via taxes or permits

We consider an asymmetric Cournot duopoly with firms facing linear Leontief technologies. A pollutant is generated proportional to the quantity of output. The government may regulate the firms by imposing Pigouvian taxes or by issuing a number of tradeable permits. We characterize the optimal tax as well as the optimal permit policy as a function of a critical damage parameter. It turns out that in general neither the social optimum is enforceable, nor is one of the two policies always superior to the other. For a wide range of parameters, however, the permit policy leads to a higher welfare.This paper has been written for the most part during a visit to the California Institute of Technology, Pasadena, California. The author would like to express his gratitude to the Division of the Humanities and Social Sciences for its hospitality, to P. Chander, W. Trockel, the participants of seminars at California Institute of Technology, State University of New York at Stony Brook, Purdue University, the universities of Bielefeld, Dortmund, and Mannheim, and two anonymous referees for their helpful comments, and especially to Jeanne Netzley for her T_EX-nical support at Caltech. Financial support by the state government of Nordrhein-Westfalen (von Bennigsen-Foerder Preis) is gratefully acknowledged.     

Taxation, Bequests, and Short and Long Run Timber Supplies: An Overlapping Generations Problem

This paper uses an overlapping generations model with one-sided altruism to study the effects of several forest taxes that target bequests and affect timber supply. Unlike previous work, we investigate bequests and timber supply in both the short and long run when bequests are costly (e.g., taxed). The landowner's problem is examined in the short run, while the government's problem is examined in the long run assuming the existence of a steady state. We also consider taxes targeting harvests, growth, savings and bequests. Several new results are established concerning the interactions of taxes that might be used by a government to alter short and long run forest capital stocks: (i) the presence of a forest bequest tax affects the neutrality of harvest tax in both the short and long run, (ii) in the long run the bequest tax decreases bequests and timber supplies. When the bequest tax is not present, the capital income tax is neutral with respect to bequest and timber supply, while the harvest tax is neutral only if forest productivity is also not taxed. Finally, (iii) in the short run, the substitution and total effects of taxes in landowner decisions generally depend on the presence of the bequest tax. The results have implications for Pigouvian tax design and second best tax choice.     

On the Role of Green Taxes in Social Accounting

This paper addresses social accounting numerically in a dynamic generalequilibrium model. The main purposes are to study: (i) whether emissiontaxes based on static willingness to pay information can be used to improvethe welfare level, and; (ii) whether these taxes provide close enoughapproximations of the correct Pigouvian emission tax to be useful in thecontext of social accounting. The results indicate that, if environmentalquality is relatively linear with respect to pollution, the approximation ofthe Pigouvian emission tax will bring the economy close to the sociallyoptimal solution and, at the same time, provide a close approximation of thevalue of net investments in environmental capital.     

Externalities in a spatial context: The case of air pollution

In this paper air pollution externalities are analyzed in an explicit spatial setting that recognizes the spatial interdependence of polluters and their victims. Optimal environmental policies are shown to consist not only of Pigouvian taxes but of two other policies. First, regulations controlling the allocation of land between polluters and victims are needed. Secondly, if pollution taxes are imposed by local governments, in general it will be necessary for the federal government to take some of the tax proceeds and redistribute them amongst localities. For example, some of the proceeds in heavily taxed and polluted communities may have to be redistributed to lightly taxed and polluted communities.     

Vertical externalities in tax setting: evidence from gasoline and cigarettes

A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.     

Strategic state-level environmental policy with asymmetric pollution spillovers

This paper examines the strategic behavior of state-level utility regulators in the context of the federal tradable emissions permits market when state-to-state pollution spillovers are asymmetric. Strategic behavior is possible because a state’s environmental policy indirectly affects the price of permits and, therefore, abatement in other states. We show that the optimal pollution penalty is comprised of two parts: (i) a Pigouvian tax, adjusted for state-to-state spillovers; and (ii) an optimal tariff designed to improve the terms of trade in permits. Generally, abatement costs are not minimized and the outcome is Pareto inefficient, regardless of the size of the market.     

Optimal climate and fiscal policy in an OLG economy

This paper develops a climate–economy model to study the joint design of optimal climate and fiscal policies in economies with overlapping generations (OLGs). I demonstrate how capital taxation, if optimal, drives a wedge between the market costs of carbon (the net present value of marginal damages using the market interest rate) and the Pigouvian tax (the net present value of marginal damages using the consumption discount rate of successive OLGs). In contrast to deterministic infinitely lived representative agent models, at the optimum, the capital income tax is positive, the carbon price equals the market costs of carbon but it falls short of the Pigouvian tax when (i) preferences are not separable over consumption and leisure; and (ii) labor income taxes cannot be age-dependent. I also show that restrictions on climate change policy provide a novel rationale for positive capital income taxes.     

Frontiers of Climate Change Economics

The potential of taxes to correct environmental externalities has long been recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high public support. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. However, we find substantially greater support for subsidies than for taxes. This can partially be explained by the participants’ expectation that the subsidy will increase their own payoffs more than a tax, but not because it is expected to be more effective in changing behavior. Furthermore, we find that with greater uncertainty, the preference for subsidies is even stronger, a result which is consistent with loss aversion.     

Social Comparisons and Optimal Taxation in a Small Open Economy

In this paper, we analyze how international capital mobility affects the optimal labor and capital income tax policy in a small open economy when consumers care about relative consumption. The main results crucially depend on whether the government can tax returns on savings abroad. If the government can use flexible residence‐based capital income taxes, then the optimal policy rules from a closed economy largely carry over to the case of a small open economy. If it cannot, then capital income taxes become completely ineffective. The labor income taxes must then indirectly also reflect the corrective purpose that the absent capital income tax would have had.     

Capital and Consumption Tax Reforms in a Small Open Economy

The effects of a reform in capital and consumption taxes on private welfare and government tax revenue are examined for a small open, capital‐importing economy. A trade‐off between private welfare and tax revenue is encountered in maximizing social welfare. Nonetheless, lowering capital taxes and raising consumption taxes can increase both private welfare and tax revenue if the initial tax rates are not optimal. In addition, a tax reform by this fashion is a likely response to a rise in the foreign rate of return on capital.     

Externalities and optimal taxation

This paper reexamines the optimal tax design problem (income and commodities) in the presence of externalities. The nature of the second–best, and the choice of the tax instruments, are motivated by the informational structure in the economy. The main results are: (i) environmental levies (linear or nonlinear) differ in formula from Pigouvian taxes by the expressions for the optimal tax on private goods; (ii) externalities do not affect commodity tax formulas (linear and nonlinear) for private goods; (iii) externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear; and (iv) a general income tax plus strictly Pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution (at any given consumption bundle).     

Revenue Recycling and the Welfare Effects of Road Pricing

This paper explores the interactions between taxes on work-related traffic congestion and pre-existing distortionary taxes in the labor market. A congestion tax raises the overall costs of commuting to work and discourages labor force participation. The resulting welfare loss in the labor market can easily exceed the Pigouvian welfare gain from internalizing the congestion externality. However, if congestion tax revenues are used to reduce labor taxes, the net impact on labor supply is positive, and this can raise the overall welfare gain from the congestion tax by around 100 percent. Nonetheless the optimal congestion tax still equals the Pigouvian tax.
JEL classification R 41; H 21; H 23     

Welfare impacts of equal-yield tax reforms in the UK economy

A multisectoral dynamic general equilibrium tax model with and without announcement effects for open and closed capital markets is used to evaluate efficiency gains and transitional effects from equal-yield tax reforms for seven different taxes in the UK economy. Impacts of an unanticipated tax reform on investment, capital accumulation, output and employment are compared to those of anticipated tax reforms. Households, producers, traders, investors and the government are found to be more capable of adjusting their economic behaviour when tax announcements are made in advance. In equal-yield tax experiments welfare gains up to 1.4% of base year GDP can occur by removing distortions in taxes. Welfare loss of up to 2.05% of it can happen if a less distortionary tax, such as the labour income tax is replaced by more distortionary taxes. These simulation results hold whether the capital markets are closed or open.     

Competing in taxes and investment under fiscal equalization

The paper considers a model of federation with two heterogeneous regions that try to attract the capital by competing in capital income taxes and public investment that enhance the productivity of capital. Regions' choices determine allocation of capital across the regions and their revenues under a tax sharing scheme. This framework allows for the examination of different approaches to fiscal equalization schemes [Boadway, R., Flatters, F., 1982. Efficiency and equalization payments in a federal system of government: a synthesis and extension of recent results, Canadian Journal of Economics 15, 613-633; Weingast, B.R., 2006. Second Generation Fiscal Federalism: Implication for Decentralized Democratic Governance and Economic Development, Working Paper, Hoover Institution, Stanford University]. We show that tax competition distorts (downwards) public investments and that the equalization grants discourage public investments with a little effect on equilibrium taxes. However, the equalization schemes remain beneficial not only for the federation and, under a low degree of regional asymmetry, also for each region.     

Relative Consumption Concerns and the Optimal Tax Mix

This paper studies the optimal tax mix (taxes on income and commodities) under asymmetric information in a two‐type model, when individuals make relative consumption comparisons. The model includes both positional and nonpositional goods, taking into account the fact that relative concerns matter for some but not for all commodities. We find that in general the whole tax system is affected by the externalities caused by the consumption of positional goods, notably also the taxes on income and on a nonpositional good. The tax rates on positional goods are higher than in the absence of status effects, reflecting their Pigouvian role. The sign of the Pigouvian part in the income tax schedule is ambiguous and depends crucially on whether status goods are complements or substitutes to leisure.     

Hybrid Carbon Incentive Mechanisms and Political Acceptability

This paper analyses how hybrid systems of carbon taxes and tradeable permits optimize some conflicting dimensions of political acceptability related to the design of these instruments. Pure systems like taxes without exemptions or auctioned tradeable permits cause problems for political acceptability in open economies due to high overall costs (abatement cost plus payments on the tax or auctions) for current polluters. Unfortunately, pure systems based on grandfathering of emission rights across the board do not provide a feasible alternative because of monitoring and enforcement problems. In contrast, consciously designed hybrid systems employ grandfathering of emission rights together with either carbon taxes or auctioned carbon permits in order to overcome acceptability problems of pure systems, while leaving incentives to reduce emissions at the margin untouched. Moreover, monitoring and enforcement costs of the hybrid systems are less due to the lower number of participating agents compared with the pure systems, while opportunities for cost- or burden-sharing exist as well.     

Debt financing of public investment: On a popular misinterpretation of “the golden rule of public sector borrowing”

In this paper I challenge the proposition that the golden rule of public sector borrowing is consistent with the principle of intertemporal allocative efficiency, in the sense that growth-enhancing public investment justifies a structural public deficit. I demonstrate that in the long run the social opportunity cost of debt-financed public investment exceeds the social opportunity cost of tax financed public investments. This result holds if the social rate of time preference is lower than the interest rate on government borrowing. Thus a benevolent government would use taxes to finance public investment. In the short run, debt financing is justified if public investment has a considerable growth effect on private consumption. This requires a corresponding initial undersupply of public capital.     

工业化中政府作用的动态经济学分析

中国工业化进程中政府起到了重要作用。本文立足于新中国工业化历程,在动态经济学框架内,讨论政府通过对劳动密集型产业征税而对资本密集型产业扶持来推动工业化的问题。在理论模型的基础上,通过数值模拟,分析了稳态下税率与各经济部门的资本、产出以及社会总资本、总产出存在的倒"U"型关系,并且对税率与政府税收之间的倒"U"型关系进行了讨论。本文认为政府对劳动密集型产业过度提取不仅不利于劳动密集型产业发展,也不利于经济总量与政府税收的增长,甚至不利于资本密集型产业的可持续增长。本研究与结论部分解释了历史上我国优先发展重工业难以维系的原因,并部分揭示了当前亟需调整经济结构的内在机理。     

The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions

This paper shows how a popular system of federal revenue equalization grants can limit tax competition among subnational governments, correct fiscal externalities, and increase government spending. Remarkably, an equalization grant can implement efficient policy choices by regional governments, even in the presence of differences in regional tax capacity, tastes for public spending, and population. If aggregate tax bases are elastic, however, equalization leads to excessive taxation. Efficiency can be achieved by a modified formula that equalizes a fraction of local revenue deficiencies equal to the fraction of taxes that are shifted backward to factor suppliers.     

Why is mobile capital taxed?

The government for a jurisdiction has both capital and labor taxes at its disposal. It taxes mobile capital to finance the public good despite the desire to attract capital and despite the tax on immobile labor if capital incomes are distributed more unequally than labor incomes among the residents of the jurisdiction. The result extends to progressive taxes and to pure redistribution.