Policy Analysis in the Presence of Distorting Taxes

Journal of Policy Analysis and Management, Vol. 19, pp. 603-613, 2000

Posted: 24 Feb 2001

See all articles by Ian W. H. Parry

Ian W. H. Parry

Resources for the Future

Wallace E. Oates

University of Maryland - Department of Economics; Resources for the Future

Abstract

This paper first describes the new literature in environmental economics on the so-called "double dividend" and then explores its implications for a broad range of economic issues. The basic finding in this literature is that in a second-best, general equilibrium setting, environmental measures raise costs and prices and thereby reduce the real wage. This rise in the cost of living reduces slightly the quantity of labor supplied in an already highly distorted labor market, giving rise to losses in social welfare that can be large relative to the basic welfare gains from improved environmental policy. These losses may be offset to some extent by using revenues (if any) from the environmental programs to reduce existing taxes on labor.

This same line of analysis applies to many programs and institutions in the economy that raise the cost of living: tariffs and quotas on imports, agricultural price-support programs, monopoly pricing, programs of occupational licensure that limit entry, and many others. The paper thus suggests that traditional, partial equilibrium benefit-cost analysis has, in many instances, unwittingly omitted a potentially quite significant class of social costs from the calculations.

Suggested Citation

Parry, Ian W. H. and Oates, Wallace, Policy Analysis in the Presence of Distorting Taxes. Journal of Policy Analysis and Management, Vol. 19, pp. 603-613, 2000, Available at SSRN: https://ssrn.com/abstract=252988

Ian W. H. Parry (Contact Author)

Resources for the Future ( email )

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HOME PAGE: http://www.rff.org/~parry

Wallace Oates

University of Maryland - Department of Economics ( email )

Tydings Hall
College Park, MD 20742
United States
301 405-3496 (Phone)

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

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