Working Paper: NBER ID: w10330
Authors: Sarah E. West; Roberton C. Williams III
Abstract: This study estimates parameters necessary to calculate the optimal second-best gasoline tax, most notably the cross-price elasticity between gasoline and leisure. Prior work indicates that in a second-best setting with distortionary income taxes, both the cost of environmental regulation and the optimal environmental tax rate depend crucially on the cross-price elasticity between a polluting good and leisure. However, no prior study on second-best environmental regulation has estimated this elasticity. Using household data, we find that gasoline is a relative complement to leisure, and thus that the optimal gasoline tax is significantly higher than marginal damages the opposite of the result suggested by the prior literature. Following this approach to estimate cross-price elasticities with leisure for other major polluting goods could strongly influence estimates of optimal environmental taxes.
Keywords: Environmental Policy; Gasoline Tax; Cross-Price Elasticity; Leisure
JEL Codes: H21; H23; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gasoline consumption (L94) | Leisure (Z31) |
| Gasoline consumption + Leisure (R41) | Optimal gasoline tax (H21) |
| Gasoline is a complement to Leisure (D10) | Optimal gasoline tax > Marginal damages (H21) |
| Tax-interaction effect (H31) | Labor supply (J22) |
| Labor supply (J22) | Welfare gain (D69) |