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On the Superiority of Corrective Taxes to Quantity Regulation

On the Superiority of Corrective Taxes to Quantity Regulation The traditional view of economists has been that corrective taxes are superior to direct regulation of harmful externalities when the state's information about control costs is incomplete. In recent years, however, many economists seem to have adopted a different view—that either corrective taxes or quantity regulation could be superior to the other. We emphasize that one argument for this newer view, identified with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax schedule) even when harm is nonlinear. But if—as seems more plausible—the state can impose a nonlinear tax equal to the schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm, then corrective taxes are superior to quantity regulation. Another argument favoring quantity regulation is that it gains appeal when the state is uncertain about the harm caused by an externality. In this case, however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity regulation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Law and Economics Review Oxford University Press

On the Superiority of Corrective Taxes to Quantity Regulation

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Publisher
Oxford University Press
Copyright
Copyright Oxford University Press 2002
ISSN
1465-7252
eISSN
1465-7260
DOI
10.1093/aler/4.1.1
Publisher site
See Article on Publisher Site

Abstract

The traditional view of economists has been that corrective taxes are superior to direct regulation of harmful externalities when the state's information about control costs is incomplete. In recent years, however, many economists seem to have adopted a different view—that either corrective taxes or quantity regulation could be superior to the other. We emphasize that one argument for this newer view, identified with Weitzman (1974), holds only if the state is constrained to use a fixed tax rate (a linear tax schedule) even when harm is nonlinear. But if—as seems more plausible—the state can impose a nonlinear tax equal to the schedule of harm or can adjust the tax rate upon learning that it diverges from marginal harm, then corrective taxes are superior to quantity regulation. Another argument favoring quantity regulation is that it gains appeal when the state is uncertain about the harm caused by an externality. In this case, however, a corrective tax schedule (equal to the expected harm schedule) is superior to quantity regulation.

Journal

American Law and Economics Review – Oxford University Press

Published: Jan 1, 2002

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