Sarah E. West

Distributional effects of alternative vehicle pollution control policies

Abstract Previous work shows that policies that subsidize new vehicles and tax size, miles, or gasoline efficiently reduce pollution. Less is known about their distributional effects. This paper examines distributional effects by estimating the joint demand for vehicles and miles, using the Consumer Expenditure Survey. Greater price responsiveness among low-income households enhances progressivity of gas or miles taxes across lower incomes, and mitigates regressivity across upper incomes. Taxes on engine size or subsidies to new vehicles are significantly more regressive than gas or miles taxes.

The Cost of Reducing Gasoline Consumption

High nominal gas prices, new awareness of threats to national security, and growing concern about global warming have reignited discussion of ways to reduce gasoline consumption in the United States. Debate centers on changing two policies already in place: the federal gas tax and Corporate Average Fuel Economy (CAFE) standards. Two influential recent reports find that increasing the gas tax would attain a given reduction in gas consumption at lower cost than would tightening CAFE standards (National Research Council, 2002; Congressional Budget Office, 2003). The gas tax has this advantage because it encourages not just increases in fuel efficiency, but also reductions in miles driven. In contrast, CAFE standards actually encourage more driving, because increases in fuel efficiency reduce the cost of gas per mile driven. We also compare the costs of the gas tax and CAFE standard but take into account interactions with preexisting tax distortions. Many papers examine the effects of these tax interactions in other contexts, but to our knowledge none of them considers the CAFE standard (see e.g., Lars Bovenberg and Ruud de Mooij, 1994; Ian Parry, 1995; Lawrence Goulder, 1995; Bovenberg and Goulder, 1996; Parry et al., 1999; Don Fullerton and Gilbert Metcalf, 2001). These interactions reduce the cost of the gas tax but increase the cost of CAFE, thus expanding the cost advantage enjoyed by the gas tax. This difference does not arise because the gas tax raises revenue, while the CAFE standard does not. Rather, this result is similar to that in West and Williams (2004a), which showed that, since gasoline and leisure are relative complements, raising the gas tax will increase labor supply, generating additional efficiency gains. In this paper, we estimate a consumer demand system using data from the Consumer Expenditure Survey and the California Air Resources Board and find that miles driven and leisure are relative complements. Thus, the gas tax encourages labor supply by raising the cost per mile driven, producing an additional efficiency gain. Conversely, because CAFE reduces the cost per mile, it discourages labor supply and yields an additional efficiency loss. While the induced changes in labor supply are tiny relative to the labor market, they are still substantial relative to the gas market and thus have a dramatic effect on the relative costs of the two policies. Our point estimates imply that they reduce the social marginal cost of the gas tax (starting from the status quo gas tax rate and ignoring the benefits of reduced gas consumption) by almost 30 percent, while increasing the marginal cost of CAFE by nearly 60 percent. This result implies that the case for raising the gas tax rather than tightening the CAFE standard is far stronger than previous studies suggest. Indeed, it strongly suggests that any tightening at all of the CAFE standard would lower welfare unless the benefits of reduced gas consumption have been seriously underestimated.

Fiscal and Externality Rationales for Alcohol Policies

Abstract Alcohol taxes are typically justified as a means to address externalities from alcohol abuse and to raise government revenue. Prior literature has focused on measuring the Pigouvian tax but has paid little attention to the fiscal rationale. This paper presents an analytical and simulation framework for assessing the optimal levels, and welfare effects, of alcohol taxes and drunk driver penalties, accounting for both externalities and how policies interact with the broader fiscal system.Under plausible parameter values and recycling possibilities, the fiscal component of the optimal alcohol tax may be as large, or larger, than the externality-correcting component. Therefore, fiscal considerations can significantly strengthen the case for higher alcohol taxes. They also raise the welfare gains from alcohol taxes relative to those from drunk driver penalties, and they warrant differential taxation of individual beverages on an alcohol equivalent basis.

Market-based Policies for Pollution Control in Latin America

Rapid urbanization and increased industrialization have led to high pollution levels throughout Latin America. Economists tout policies based on market-based economic incentives as the most cost-effective methods for addressing a wide variety of environmental problems. This chapter examines market-based incentives and their applicability to Latin America. We first review the market-based incentives traditionally used to address pollution and compare these instruments to command-and-control policies. We then discuss two sets of factors that affect how feasible and efficient pollution control policy will be in Latin America: practical considerations, and the violation of standard modeling assumptions. Finally, we compare Latin American experiences with market-based incentives to those in the U.S. and Europe and conclude with several policy recommendations.