NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Energy Taxes and Aggregate Economic Activity

Julio J. Rotemberg, Michael Woodford

NBER Working Paper No. 4576
Issued in December 1993
NBER Program(s):   EFG   PE

This paper shows that the output losses from energy taxes are significantly larger than usually computed when due account is taken of imperfect competition among energy using firms. Even with perfect competition among these firms, the loss in GNP is of the same order of magnitude as the revenue raised by these taxes. However, in the presence of imperfect competition the output losses are much higher. There are particularly large transitory losses in the immediate aftermath of energy price increases when firms act as implicitly colluding oligopolists. These losses become considerably smaller if energy taxes are phased-in. We also show that taxes that affect only household consumption of energy have much smaller effects. In particular, for the empirically plausible parameter values we consider, such taxes have no effect on employment or output in the non-energy sector.

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Document Object Identifier (DOI): 10.3386/w4576

Published: Energy Taxes and Aggregate Economic Activity, Julio I. Rotemberg, Michael Woodford. in Tax Policy and the Economy, Volume 8, Poterba. 1994

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