week 11: emissions taxes

asymmetric information

one person makes all the decisions, despite their inability to take advantage of private information held by the polluters

market-based instruments

regulator sets overall objectives, then designs a system that gives firms incentives to meet those objectives

emissions taxes and subsidies

firms essentially respond to a new price for using environmental resources

permit trading systems

firms interact to distribute the costs of causing environmental harm

emissions tax

tax on emissions produced by a pollution source

makes

tax incidence

distribution of the tax burden across consumers and producers

tax burden

change in price to producer or consumer x quantity (after tax)

statutory incidence

who literally pays the tax

tax on consumers

applied at point of sale, like a sales tax (decreases PMB)

tax on producers

applied on production process, like when reporting sales for the year (increases PMC)

progressive tax

tax rate increases as taxable amount increases or activity taxed is more likely to be conducted by higher income individuals

regressive tax

tax rate decreases as taxable amount increases or activity being taxed is more likely to be conducted by lower income individuals

pigouvian tax

should reduce or remove distortion created by externality, while also (potentially) raising revenue

optimal pigouvian tax

equal to the marginal damages at the optimal level of production

tax of this size will restore the social optimum and remove DWL

what will a higher tax result in?

more abatement

double dividend hypothesis

we reduce taxes on goods (want to encourage) and replace the lost revenue with taxes on bads like pollution (we want to discourage)

second best taxes

tend to focus on easier to measure sources of the pollutant

limits possible methods by which polluters can respond, and might encourage undesirable behavior

subsidy

pay a polluter some amount for every unit it reduces, starting from some benchmark level

acts as an opportunity cost