The Welfare Impact of Second-Best Uniform-Pigouvian Taxation: Evidence from Transportation
American Economic Journal: Economic Policy
vol. 10,
no. 4, November 2018
(pp. 211-42)
(Complimentary)
Abstract
When consumers or firms don't face the true social cost of their actions, market outcomes are inefficient. In the case of negative externalities, Pigouvian taxes are one way to correct this market failure, but it may be infeasible to tax the externality directly. The alternative, taxing a related product, will be second-best. In this paper, we show that in the presence of heterogeneous externalities and elasticities, this type of indirect tax performs poorly. In our empirical application, gasoline taxes to address pollution externalities, less than a third of the deadweight loss of the externality is addressed by second-best optimal taxes.Citation
Knittel, Christopher R., and Ryan Sandler. 2018. "The Welfare Impact of Second-Best Uniform-Pigouvian Taxation: Evidence from Transportation." American Economic Journal: Economic Policy, 10 (4): 211-42. DOI: 10.1257/pol.20160508Additional Materials
JEL Classification
- D62 Externalities
- H21 Taxation and Subsidies: Efficiency; Optimal Taxation
- H23 Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H71 State and Local Taxation, Subsidies, and Revenue
- H76 State and Local Government: Other Expenditure Categories
- Q53 Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
- R48 Transportation Economics: Government Pricing and Policy
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