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 roa...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2000/12/748709/public-expenditures-environmental-protection-cost-funds-irrelevant http://hdl.handle.net/10986/19734 |
| Summary: | 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
context of 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. |
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