Designing Economic Instruments for the Environment in a Decentralized Fiscal System

When external effects are important, markets will be inefficient, and economists have considered several broad classes of economic instruments to correct these inefficiencies. However, the standard economic analysis has tended to neglect important...

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Bibliographic Details
Main Authors:	Alm, James, Banzhaf, H. Spencer
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ABATEMENT COSTS ACID RAIN AIR POLLUTION AIR QUALITY ALLOWANCE TRADING AVERAGE COSTS AVERAGE TAX RATES BENEFICIARIES BUSINESS CYCLES CAPITAL FLOWS CENTRAL GOVERNMENTS COMMODITIES COMPETITIVE MARKET CONSUMPTION TAX CONTINUOUS MONITORING COST SAVINGS CREDIBILITY DECENTRALIZATION DEPOSIT DEVELOPED COUNTRIES DEVELOPING COUNTRIES DEVELOPMENT BANK DISTRIBUTION OF INCOME DRINKING WATER ECONOMIC ANALYSIS ECONOMIC CONDITIONS ECONOMIC GROWTH ECONOMIC INCENTIVES ECONOMIC INSTRUMENTS ECONOMICS ECONOMISTS ELECTRICITY EMISSION STANDARDS EMISSIONS EMISSIONS STANDARDS EMISSIONS TRADING EMPIRICAL EVIDENCE ENVIRONMENTAL ENVIRONMENTAL ECONOMICS ENVIRONMENTAL EXTERNALITIES ENVIRONMENTAL POLICIES ENVIRONMENTAL POLICY ENVIRONMENTAL PROBLEMS ENVIRONMENTAL PROTECTION ENVIRONMENTAL QUALITY ENVIRONMENTAL STANDARD ENVIRONMENTAL STANDARDS ENVIRONMENTAL TAXATION ENVIRONMENTAL TAXES EQUILIBRIUM EQUILIBRIUM ANALYSES EXCISE TAXES EXPENDITURE EXPENDITURE ASSIGNMENT EXPENDITURE RESPONSIBILITIES EXPENDITURES EXTERNAL COSTS EXTERNALITIES FACTORS OF PRODUCTION FINANCIAL CAPITAL FISCAL AUTONOMY FISCAL CAPACITIES FISCAL CAPACITY FISCAL CONSTRAINTS FISCAL FEDERALISM FISCAL POLICY FUEL TAXES GEOGRAPHIC SCOPE GLOBAL CLIMATE GLOBAL CLIMATE CHANGE GLOBAL ECONOMY GLOBALIZATION GOVERNMENT EXPENDITURE GOVERNMENT EXPENDITURES GOVERNMENT FINANCE GOVERNMENT FINANCES GOVERNMENT POLICIES GREEN ECONOMICS HARMONIZATION INCOME INCOME TAX INCOME TAXES INCOMES INDIVIDUAL POLLUTERS INELASTIC DEMAND INFLATION INFORMATION SERVICES INFORMATION SHARING INSTRUMENT INTANGIBLE INTANGIBLE GOODS INTEREST INCOME INTERGOVERNMENTAL TRANSFERS INTERNATIONAL BANK JURISDICTION JURISDICTIONS LEGAL AUTHORITY LEVIES LEVY LOCAL AUTONOMY LOCAL FINANCE LOCAL GOVERNMENT LOCAL GOVERNMENT SERVICES LOCAL GOVERNMENT TAX LOCAL GOVERNMENTS LOCAL TAXES LOTTERIES MARGINAL ABATEMENT MARGINAL ABATEMENT COSTS MARGINAL COST MARGINAL COSTS MARKET FAILURE MARKET FAILURES MARKET PRICES MARKET TRANSACTIONS MATCHING GRANTS MONETARY POLICY MONITORING EQUIPMENT MONOPOLY MORAL HAZARD MPC NATURAL RESOURCE OPEN COUNTRY OUTPUT OUTPUTS OZONE LAYER POLICY DECISIONS POLICY INSTRUMENTS POLITICAL ECONOMY POLLUTERS POLLUTION POLLUTION ABATEMENT POLLUTION CHARGES POLLUTION CONTROL POLLUTION FEES POLLUTION LEVELS POLLUTION PERMITS POLLUTION TAX POLLUTION TAXES POWER PLANTS PRICE CHANGES PRIVATE COSTS PRODUCERS PROPERTY TAX PROPERTY TAXES PROVISIONS PUBLIC PUBLIC ECONOMICS PUBLIC FINANCE PUBLIC FINANCES PUBLIC GOOD PUBLIC GOODS PUBLIC POLICY RECYCLING REGISTRATION FEE REGRESSIVE TAX REGULATORY CONSTRAINTS RESERVE RESOURCE USE REVENUE ASSIGNMENT REVENUE PERFORMANCE REVENUE SHARING REVENUE SOURCES REVENUE TRANSFERS ROADS RULE OF LAW SALES TAX SALES TAXES SERIAL NUMBERS SHAREHOLDERS SIN TAXES SOCIAL COST SOCIAL COSTS SOFT BUDGET CONSTRAINTS SOLID WASTE COLLECTION STABILIZATION POLICIES STABILIZATION POLICY STAMP DUTIES SUBNATIONAL GOVERNMENTS SUBSIDIARITY PRINCIPLE SULFUR DIOXIDE SURCHARGES SURTAX SURTAXES SUSTAINABLE DEVELOPMENT TANGIBLE GOODS TAX ASSIGNMENT TAX BASE TAX BASES TAX BREAKS TAX COLLECTIONS TAX COMPETITION TAX INCENTIVES TAX LAWS TAX LIABILITIES TAX POLICIES TAX POLICY TAX RATE TAX SHARING TAX SYSTEM TAX SYSTEMS TAXATION TAXPAYERS TRADABLE PERMITS TRADEOFFS TRADES TRADING SYSTEM TRANSFER TAX TRANSITION COUNTRIES TRANSITION ECONOMIES TREASURY UNEMPLOYMENT URBAN ECONOMICS URBAN GROWTH URBAN PUBLIC FINANCE USER CHARGES UTILITIES VALUATION VALUE ADDED TAX VALUE ADDED TAXES WAGES WASTE MANAGEMENT WELFARE ECONOMICS
Online Access:	http://documents.worldbank.org/curated/en/2007/10/8560263/designing-economic-instruments-environment-decentralized-fiscal-system http://hdl.handle.net/10986/7566

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Summary:	When external effects are important, markets will be inefficient, and economists have considered several broad classes of economic instruments to correct these inefficiencies. However, the standard economic analysis has tended to neglect important distinctions and interactions between the geographic scope of pollutants, the enforcement authority of various levels of government, and the fiscal responsibilities of the levels of government. For example, externalities generated in a particular local area may be confined to the local area or may spill over to other jurisdictions. Also, local governments may be well informed about how best to regulate or enforce pollution control within their jurisdiction, but they may not consider the effects of their actions on other jurisdictions. Finally, the existence of locally-generated waste emissions affects the appropriate assignment of both expenditure and tax responsibilities among levels of government. The standard analysis therefore focuses mainly upon an aggregate (or national) perspective, it typically ignores the possibility that the externality may be created and addressed by local governments, and it does not consider the implications of decentralization for the design of economic instruments targeted at environmental problems. This paper examines the implications of decentralization for the design of corrective policies; that is, how does one design economic instruments in a decentralized fiscal system in which externalities exist at the local level and in which subnational governments have the power to provide local public services, as well as to choose tax instruments that can both finance these expenditures and correct the market failures of externalities?

Designing Economic Instruments for the Environment in a Decentralized Fiscal System

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