TY  - JOUR
AU  - West,Sarah E.
AU  - Williams,Roberton C.
TI  - Empirical Estimates for Environmental Policy Making in a Second-Best Setting
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10330
PY  - 2004
Y2  - March 2004
UR  - http://www.nber.org/papers/w10330
L1  - http://www.nber.org/papers/w10330.pdf
N1  - Author contact info:
Sarah West
Dept. of Economics
Macalester College
1600 Grand Ave.
St. Paul, MN 55105
E-Mail: wests@macalester.edu

Roberton C. Williams, III
Department of Agricultural and Resource Economics
University of Maryland,
Symons Hall
College Park, MD 20742
Tel: 301-405-1284
Fax: 301-314-9091
E-Mail: rwilliams@arec.umd.edu
AB  - This study estimates parameters necessary to calculate the optimal second-best gasoline tax, most notably the cross-price elasticity between gasoline and leisure. Prior work indicates that in a second-best setting with distortionary income taxes, both the cost of environmental regulation and the optimal environmental tax rate depend crucially on the cross-price elasticity between a polluting good and leisure. However, no prior study on second-best environmental regulation has estimated this elasticity. Using household data, we find that gasoline is a relative complement to leisure, and thus that the optimal gasoline tax is significantly higher than marginal damages   the opposite of the result suggested by the prior literature. Following this approach to estimate cross-price elasticities with leisure for other major polluting goods could strongly influence estimates of optimal environmental taxes.
ER  -