Regulation Versus Taxation
NBER Working Paper No. 16413
We study which policy tool and at what level a majority chooses in order to reduce activities with negative externalities. We consider three instruments: a rule, that sets an upper limit to the activity which produces the negative externality, a quota that forces a proportional reduction of the activity, and a proportional tax on it. For all instruments the majority chooses levels which are too restrictive when the activity is performed mainly by a small fraction of the population, and when costs for reducing activities or paying taxes are sufficiently convex. Also a majority may prefer an instrument different than what a social planner would choose; for instance a rule when the social planner would choose a tax.
This paper was revised on September 6, 2013
Published: Alesina, Alberto & Passarelli, Francesco, 2014. "Regulation versus taxation," Journal of Public Economics, Elsevier, vol. 110(C), pages 147-156.
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