The Welfare Impact of Second-Best Uniform-Pigouvian Taxation: Evidence from Transportation

Christopher Knittel and Ryan Sandler

American Economic Journal: Economic Policy, 2018, vol. 10, issue 4, 211-42

Abstract: When consumers or firms don't face the true social cost of their actions, market outcomes are inefficient. In the case of negative externalities, Pigouvian taxes are one way to correct this market failure, but it may be infeasible to tax the externality directly. The alternative, taxing a related product, will be second-best. In this paper, we show that in the presence of heterogeneous externalities and elasticities, this type of indirect tax performs poorly. In our empirical application, gasoline taxes to address pollution externalities, less than a third of the deadweight loss of the externality is addressed by second-best optimal taxes.

JEL-codes: D62 H21 H23 H71 H76 Q53 R48 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pol.20160508
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Citations: View citations in EconPapers (37)

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