Working Paper: NBER ID: w11311
Authors: Don Fullerton; Garth Heutel
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.
Keywords: Environmental taxes; General equilibrium; Tax incidence
JEL Codes: H23; Q52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pollution tax (Q52) | price of dirty good (P22) |
| pollution tax (Q52) | wage relative to return on capital (D33) |
| substitutability of labor and capital for pollution (Q52) | distributional effects of environmental policy (H23) |