Working Paper: NBER ID: w16413
Authors: Alberto F. Alesina; Francesco Passarelli
Abstract: We study which policy tool and at what level a majority chooses in order to reduce activities with negative externalities. We consider three instruments: a rule, that sets an upper limit to the activity which produces the negative externality, a quota that forces a proportional reduction of the activity, and a proportional tax on it. For all instruments the majority chooses levels which are too restrictive when the activity is performed mainly by a small fraction of the population, and when costs for reducing activities or paying taxes are sufficiently convex. Also a majority may prefer an instrument different than what a social planner would choose; for instance a rule when the social planner would choose a tax.
Keywords: regulation; taxation; negative externalities; majority voting
JEL Codes: D62; D72; D78; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| majority of voters generating a negative externality (minority) (D62) | overly restrictive regulations (L51) |
| majority of voters generating a negative externality (majority) (D62) | insufficiently stringent taxes (H29) |
| median voter's type (D79) | policy outcome (D78) |
| majority voting (D79) | distortion in policy outcomes (D73) |