Tax and Subsidy Combinations for the Control of Car Pollution

Despite technological advances, an individual car's emissions still cannot be measured reliably enough to impose a Pigovian tax. This paper explores alternative market incentives that could be used instead. We solve for second-best combinations of uniform taxes on gasoline, engine size, and vehicle age. For 1,261 individuals and cars in the 1994 Consumer Expenditure Survey, we record the car's model, year, and number of cylinders. We then seek a corresponding car in data from the California Air Resources Board that shows the car's engine size, fuel efficiency, and emissions per mile. We calculate the welfare improvement from a zero-tax scenario to the ideal Pigovian tax, and we find that 71 percent of that gain can be achieved by the second-best combination of taxes on gas, size, and vintage. A gas tax alone attains 62 percent of that gain. These results are robust to variation in the elasticity of substitution among goods.