The Case for a Two-Part Instrument: Presumptive Tax and Environmental Subsidy

Don Fullerton, Ann Wolverton

NBER Working Paper No. 5993
Issued in April 1997
NBER Program(s):Public Economics

This paper builds two simple general equilibrium models to demonstrate the equivalence between the Pigovian tax and the combination of a presumptive tax and an environmental subsidy. A presumptive tax is a tax that is imposed under the presumption that all production uses a dirty technology or all consumption goods become waste. The environmental subsidy is then provided only to the extent that production uses a cleaner technology or that consumption goods are recycled. To analyze the usefulness of the tax-subsidy combination, we review conceptual considerations regarding its implementation and practical considerations regarding its actual use throughout the world. While the tax-subsidy combination is increasingly being used, in the form of a deposit-refund system, we argue that more flexible interpretations are important to explore. The two parts of such a policy do not have to apply to the same side of the market. The tax and subsidy do not have to equal one another, and they can apply to different goods altogether. Compared to the Pigovian tax, a two-part instrument may be easier to enforce, may be easier to enact, and can still force the market to recognize the social cost of disposal.

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Document Object Identifier (DOI): 10.3386/w5993

Published: Environmental and Public Economics: Essays in Honor of Wallace E. Oates, Panagaria, A., P. Portney and R. Schwab, eds., Cheltenham, UK: Edward Elgar, 1999, pp. 32-57.

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