Externalities and Production Efficiency
The author brings together two of government's primary challenges: environmental protection, and taxation to generate revenues. If negative externalities can be reduced not only by changes in consumption patterns, but also by making each activ...
| Main Author: | |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
|
| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/04/437745/externalities-production-efficiency http://hdl.handle.net/10986/18836 |
| Summary: | The author brings together two of
government's primary challenges: environmental
protection, and taxation to generate revenues. If negative
externalities can be reduced not only by changes in
consumption patterns, but also by making each activity
cleaner (abatement efforts), how shall inducements to
various approaches be combined? If negative externalities
are caused by agents as different as consumers, producers,
and government, how does optimal policy combine inducements
to reduce pollution? Intuitively it seems right to tax
emissions neutrally, based on marginal damages - no matter
which activity pollutes, or whether the polluter is rich or
poor, consumer or producer, private or public. The author
provides a theoretical basis for such simplicity. Three
assumptions are critical to his analysis: 1) Returns to
scale do not influence the traditional problem of revenue
generation. 2) consumers have equal access to pollution
abatement opportunities (but he also relaxes this
assumption). 3) Planners can differentiate policy
instruments (emission taxes or abatement standards) by
polluting good, and by whether the polluter is a consumer,
producer, or government, but they cannot differentiate such
instruments (or commodity taxes) by personal
characteristics, or make them non-linear in individual
emissions. Among the author's findings and conclusions:
Abatement efforts and consumption adjustments at all stages
are optimally stimulated by a uniform emission tax, levied
simply where emissions occur. It simplifies things that the
optimal abatement is independent of whether the car is used
by government, firms, or households - for weddings, or for
work. It also simplifies implementation, that the stimulus
to abatement at one stage (say, the factory) is independent
of whether it yields emission reductions from the factory,
or form others (say, from car owners who by the
factory's products). Finally, ministers of finance and
of the environment should coordinate efforts, but they need
not engage in each other's business. The minister of
environment need not know which commodities are elastic in
demand, and thus would bear a low commodity tax. The finance
minister need not know which commodities or agents pollute
or who pays emissions taxes. |
|---|