Working Paper: NBER ID: w4576
Authors: Julio J. Rotemberg; Michael Woodford
Abstract: This paper shows that the output losses from energy taxes are significantly larger than usually computed when due account is taken of imperfect competition among energy using firms. Even with perfect competition among these firms, the loss in GNP is of the same order of magnitude as the revenue raised by these taxes. However, in the presence of imperfect competition the output losses are much higher. There are particularly large transitory losses in the immediate aftermath of energy price increases when firms act as implicitly colluding oligopolists. These losses become considerably smaller if energy taxes are phased-in. We also show that taxes that affect only household consumption of energy have much smaller effects. In particular, for the empirically plausible parameter values we consider, such taxes have no effect on employment or output in the non-energy sector.
Keywords: Energy Taxes; Economic Activity; Imperfect Competition
JEL Codes: H23; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| energy taxes (H23) | output losses (D57) |
| imperfect competition (L13) | higher social costs of output reductions (D61) |
| energy taxes (affecting only household consumption) (H31) | negligible effects on employment or output in non-energy sector (F69) |
| imperfect competition (L13) | exacerbated contractionary effects of energy taxes on energy-using industries (H23) |
| gradual phase-in of energy taxes (H23) | mitigate contractionary effects (E69) |
| energy taxes (H23) | output loss in GNP (E20) |