The general equilibrium incidence of environmental taxes

Don Fullerton, Garth Heutel

Research output: Contribution to journalArticlepeer-review

Abstract

We study the distributional effects of a pollution tax in general equilibrium, with general forms of substitution where pollution might be a relative complement or substitute for labor or for capital in production. We find closed form solutions for pollution, output prices, and factor prices. Various special cases help clarify the impact of differential factor intensities, substitution effects, and output effects. Intuitively, the pollution tax might place disproportionate burdens on capital if the polluting sector is capital intensive, or if labor is a better substitute for pollution than is capital; however, conditions are found where these intuitive results do not hold. We show exact conditions for the wage to rise relative to the capital return. Plausible values are then assigned to all the parameters, and we find that variations over the possible range of factor intensities have less impact than variations over the possible range of elasticities.

Original languageEnglish (US)
Pages (from-to)571-591
Number of pages21
JournalJournal of Public Economics
Volume91
Issue number3-4
DOIs
StatePublished - Apr 2007
Externally publishedYes

Keywords

  • Analytical solutions
  • Distributional burdens
  • Pollution policy
  • Sources side
  • Uses side

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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