The Economic Impact of Water Taxes: A Computable General Equilibrium Analysis with an International Data Set

Maria Berrittella, Katrin Rehdanz, Roberto Roson and Richard Tol

No 331655, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: Water is scarce in many countries. One instrument to improve the allocation of a scarce resource is (efficient) pricing or taxation. However, water is implicitly traded on international markets, particularly through food and textiles, so that impacts of water taxes cannot be studied in isolation, but require an analysis of international trade implications. We include water as a production factor in a multi-region, multi-sector computable general equilibrium model (GTAP), to assess a series of water tax policies. We find that water taxes reduce water use, and lead to shifts in production, consumption, and international trade patterns. Countries that do not levy water taxes are nonetheless affected by other countries’ taxes. Taxes on agricultural water use drive most of the economic and welfare impacts. Reductions in water use (welfare losses) are less (more) than linear in the price of water. The results are sensitive to the assumed ability to substitute other production factors for water. A water tax on production would have different effects on water use, production and trade patterns, and the size and distribution of welfare losses than would a water tax on final consumption.

Keywords: Resource/Energy Economics and Policy; International Relations/Trade (search for similar items in EconPapers)
Pages: 17
Date: 2007
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Working Paper: The Economic Impact Water Taxes: a Computable General Equilibrium Analysis with an International Data Set (2008)
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