Taxing Bads by Taxing Goods
Authors: Eskeland, Gunnar S.; Devarajan, Shantayanan
Publication date: January 1996
Solving environmental problems, in both developing and industrial countries, appears to be more challenging than merely applying a fee on polluters. The purpose of this book is to show that indirect instruments designed to reduce the scale of output can be important complementary measures in a cost-effective pollution control program. Examples of such instruments are taxes on output or on polluting inputs, called presumptive because their target is the pollution presumed to be associated with the activity. A combination of the two types - those that reduce output and those that reduce emissions per unit of output - can mimic fairly well the effect of an optimal emission fee without the latter's monitoring requirements. A recurring theme throughout the book is that taxation of fuel use can be a powerful indirect instrument for controlling air pollution because of the association between fuel use and emissions. In sum, the authors advocate taxing a "bad" (pollution) by taxing goods (fuels) as part of a program to address air pollution when monitoring of emissions is prohibitively expensive. Chapter I lays out the authors' basic analytical framework. Chapter II treats the case of mobile-source pollution through an examination of gasoline taxes and regulatory policies in Mexico City. Chapter III addresses point-source pollution and the potential for altering the fuel mix in industries in Indonesia and Chile, based on firm-level data. A general equilibrium model of Indonesia portrays the economywide consequences of changes in fuel taxes. Finally, chapter IV contains some concluding remarks.
Publisher: World Bank