re examination of uniform commodity taxes under a non linear income tax system and its implication for production efficiency abstract this paper shows that the result of uniform commodity tax under nonlinear income taxation by atkinson and stiglitz 1976 no longer holds if the production side of an economy is taken into the consideration in particular imposing a non uniform commodity tax can pareto improve welfare even under nonlinear income taxation in addition the paper shows that if the government uses a nonlinear income tax system for income redistribution then the introduction of distortions in the public sector can pareto improve welfare contrary to the results in diamond and mirrlees 1971

on the undesirability of commodity taxation even when income taxation is not optimal abstract an important result due to atkinson and stiglitz 1976 atkinson a b stiglitz j e 1976 the design of tax structure direct versus indirect taxation journal of public economics 6 55 75 is that differential commodity taxation is not optimal in the presence of an optimal nonlinear income tax given weak separability of utility between labor and all consumption goods this article demonstrates that this conclusion holds regardless of whether the income tax is optimal in particular given any commodity tax and income tax system differential commodity taxation can be eliminated in a manner that results in a pareto improvement also differential commodity taxation can be proportionally reduced so as to generate a pareto improvement in addition for commodity tax reforms that neither eliminate nor proportionally reduce differential taxation a simple efficiency condition is offered for determining whether a pareto improvement is possible

market structure and market outcomes in deregulated rail freight markets abstract using cross section data on a national sample of city pair markets for rail freight i examine correlations between prices quantities and the number of single line and interline firms serving markets i estimate the reduced form of a structural model in which rail rates and quantities depend on the number of firms i find that rates increase as the number of firms serving the market falls and quantities shipped rise as the number of firms falls the result is consistent with market power for rail freight shippers that causes markups to rise when fewer firms serve the market and is not consistent with other explanations of the relationship between number of firms and rates and quantities interline shipment is much more costly than single line suggesting that mergers may be desirable even if they exacerbate market power problems

regressive sin taxes with an application to the optimal soda tax a common objection to sin taxes corrective taxes on goods that are thought to be overconsumed such as cigarettes alcohol and sugary drinks is that they often fall disproportionately on low income consumers this paper studies the interaction between corrective and redistributive motives in a general optimal taxation framework and delivers empirically implementable formulas for sufficient statistics for the optimal commodity tax the optimal sin tax is increasing in the price elasticity of demand increasing in the degree to which lower income consumers are more biased or more elastic to the tax decreasing in the extent to which consumption is concentrated among the poor and decreasing in income effects because income effects imply that commodity taxes create labor supply distortions contrary to common intuitions stronger preferences for redistribution can increase the optimal sin tax if lower income consumers are more responsive to taxes or are more biased as an application we estimate the optimal nationwide tax on sugar sweetened beverages using nielsen homescan data and a specially designed survey measuring nutrition knowledge and self control holding federal income tax rates constant our estimates imply an optimal federal sugar sweetened beverage tax of 1 to 2 1 cents per ounce although optimal city level taxes could be as much as 60 lower due to cross border shopping

environmental taxation inequality and engel s law the double dividend of redistribution empirical evidence shows that low income households spend a high share of their income on pollution intensive goods this fuels the concern that an environmental tax reform could be regressive we employ a framework which accounts for the distributional effect of environmental taxes and the recycling of the revenues on both households and firms to quantify changes in the optimal tax structure and the equity impacts of an environmental tax reform we characterize when an optimal environmental tax reform does not increase inequality even if the tax system before the reform is optimal from a non environmental point of view if the tax system before the reform is calibrated to stylized data and is thus non optimal we find that there is a large scope for inequality reduction even if the government is restricted in its recycling options

taxing consumption and other sins taxes as their primary tools to collect revenue in the rest of the world governments also use income and payroll taxes but rely much more heavily than does the united states on taxing consumption consumption taxes take many forms including general sales taxes value added taxes and excise taxes on the consumption of specific items including gasoline alcohol tobacco products firearms air travel telephone communication and others the u s government does not use a value added tax making the united states unique among high income countries and a rarity in the larger world as of 2004 at least 134 countries rely on value added taxes as a substantial source of funding value added taxes are sophisticated forms of sales taxes in which taxes are withheld by businesses according to value added at every stage of production american states do impose sales taxes on broad categories of consumer purchases but state governments are considerably smaller than national governments and their sales tax rates are very low compared to the value added tax rates used in the rest of the world the united states also imposes unusually low excise taxes even after controlling for total tax collections which are lower in the united states than they are in most high income countries the deliberate social engineering that underlies the selection of certain commodities for unusually high rates of taxation appeals less to americans than to residents of other countries moreover the sin taxes on

optimal taxation and cross price effects on labor supply estimates of the optimal gas tax abstract this study estimates parameters necessary to calculate the optimal second best gasoline tax most notably the cross price elasticity between gasoline and leisure prior theoretical work indicates the importance of this elasticity but despite this almost none of the prior studies of commodity taxation and none of the studies on second best environmental regulation actually estimate it using household data we find that gasoline is a relative complement to leisure and thus that the optimal gasoline tax is significantly higher than marginal damages the opposite of the result suggested by the bulk of the prior literature indeed even if there were no externalities at all associated with gasoline the optimal tax rate would still be almost equal to the average gas tax rate in the u s following this approach to estimate cross price elasticities with leisure could strongly influence estimates of optimal rates for other important commodity or pollution taxes

redistribution policy and the expansion of the public sector abstract during the first part of this century life cycle and insurance type considerations seem to have dominated redistribution policy in particular when we look at the consequences for the expansion of public spending by contrast during recent decades fragmented horizontal redistributions between various minority groups have probably been the most important mechanisms the self interest of different groups of the electorate seems to have provided the most powerful motive behind these various policies although welfare altruism and what in this paper are called considerations of consequential externalities have probably been important motives behind redistribution in favor of the poor

a new method of estimating risk aversion i show existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model i derive a formula for the coefficient of relative risk aversion in terms of the ratio of the income elasticity of labor supply to wage elasticity and degree of complementarity between consumption and labor i bound the degree of complementarity using data on consumption choices when labor supply varies across states using labor supply elasticity estimates i find a mean estimate of 1 then show generating 2 requires that wage increases cause sharper labor supply reductions jel d81 j22

peacock and wiseman on the growth of public expenditure the late nineteenth century view of the growth of the public sector enuciated by adolph wagner 1890 now known as wagner s law accorded well with the doctrine of comparative advantage with the growth of the industrial economy a complementary demand was set up alongside industrial and manufacturing expansion for transport and communication services energy and waste disposal central and local governments were viewed as having a comparative advantage in providing such services justifying wagner s law that government expenditure would continuously increase as a percentage of gross domestic product in a growing economy in 1961 as part of their seminal study of the growth of public expenditure in the united kingdom alan t peacock and jack wiseman1 questioned the generality of wagner s law and introduced their now famous displacement effect hypothesis to explain the time path of the growth of government in democratic countries writing before the public choice research program was at all well established peacock and wiseman nevertheless rejected wagner s reliance upon the organic state and relied instead on political propositions that

a graphical exposition of the economic theory of regulation i introduction historically many if not most economic theories have advanced in three fairly distinct stages progressing from descriptive to graphical to mathematical formulations generally in that sequence the economic theory of regulation however has been an exception to this normal order of progression the fundamental corpus of this theory was laid out initially in the descriptive discussions provided by stigler 1971 posner 1974 and others from these early presentations however the theory was subsequently formalized mathematically by peltzman 1976 and becker 1983 without passing through the graphical stage of its development 1 regardless of the chronological order of the progression of this theory however we believe that a fully developed graphical exposition is likely to be of considerable value even now at least two considerations support this view specifically by making this theory more accessible to a wider audience and by better illustrating the basic underlying mechanics behind it the likelihood of significant future advancement we believe is enhanced indeed currently there remain a number of observed regulatory phenomena that have yet to be satisfactorily explained by the existing theory e g the deregulation movement and the specific pattern of observed cross subsidies 2 an improved understanding of the fundamental components of the theory should facilitate its further advancement and lead to an expanded ability to explain a broader range of regulatory practices we illustrate this point through a variety of applications to provide an improved understanding of inter alia the markets likely to be chosen for regulation the propensity of regulatory benefits to be spread across interest groups the symbiotic nature of regulation and cross subsidization and the economics of deregulation we also are able to depict graphically the relationship between the economic theory of regulation and the traditional normative model of regulation which assumes that regulators maximize social welfare the article is organized as follows in section ii we briefly describe the regulator s general optimization problem viz what precisely is being maximized and what constraints apply to that maximization problem the latter topic the constraints will be of primary interest here section iii presents the formal graphical analysis of these constraints by deriving what we label the regulator s benefits budget constraint as its name suggests the benefits budget constraint defines the locus of maximum benefits the regulator is able to deliver to the affected interest groups importantly that constraint is determined by the prior unregulated market equilibrium price and output and by general market parameters such as demand elasticity costs and so on section iv describes the resulting regulatory equilibrium section v then applies the graphical tools developed in sections ii iv to explain a number of commonly observed regulatory phenomena here both the ability to provide new insights and the pedagogical value of the graphical approach are illustrated finally section vi concludes ii the regulator s general optimization problem the economic theory of regulation postulates that regulators will attempt to maximize some objective function most generally the regulator s utility by implementing regulatory policies that benefit and by necessity harm particular interest groups 3 the benefits provided to these groups are then used to purchase from them the objects that are directly valued by the regulator that is the direct arguments contained in the regulator s objective function the distribution of these benefits and harms across the affected groups which is determined by the regulator s choice of a particular regulatory policy is selected to maximize the value of the regulator s objective function the ability of any specific interest group to curry regulatory favor then will depend on the capacity of that group to deliver the objects of value to the regulator in exchange for the benefits provided by the regulatory process

indirect taxation is superfluous under separability and taste homogeneity a simple proof indirect taxation is of no use when nonlinear income taxation is available in an economy where everyone has the same taste for goods an elementary proof of this result due to atkinson and stiglitz atkinson a stiglitz j 1976 the design of tax structure direct versus indirect taxation journal of public economics 6 55 75 is provided

optimal redistribution when different workers are indistinguishable using the standard non linear income and commodity taxation framework this paper examines the optimal policy to be adopted when the same labor disutility can receive two opposite interpretations taste for leisure and activity limitation in the absence of complete information about individual characteristics an income tax does not allow to distinguish lazy from handicapped individuals one may however rely on a combination of commodity and income taxes to redistribute from the former to the latter when they differ in their preferences for commodities

new hampshire s tax base limits an example of the leviathan model this study views the lack of an income tax on wages and salaries and a general sales tax in new hampshire as tax base limits i use the leviathan model to analyze the differences between the fiscal system in new hampshire and the fiscal systems in vermont maine and massachusetts vermont maine and massachusetts do not have the tax base limits that new hampshire has from 1957 to 1989 new hampshire had lower state and local government tax and expenditure levels than the other three states more rapid population growth lower welfare expenditures but comparable levels of expenditures for several of the major public services and a more competitive structure of state and local government

the marginal cost of raising tax revenue and redistributing income we present analytic formulas for calculating marginal welfare costs when taxes are levied against the wages of a heterogeneous population of households and marginal tax revenue finances either the supply of a public good or lump sum transfers the formulas are applied to explain the wide discrepancy between estimates of marginal welfare costs for redistribution previously obtained through computer simulation procedures our calculations reveal that these procedures introduced lump sum transfers that were not specified as part of the reforms to be simulated but explain most of the differences between their estimates we also show that welfare cost estimates are quite sensitive to the elasticity of labor supply with respect to exhaustive public spending

railroads competition the santa fe southern pacific merger proposal in september of 1983 the santa fe and southern pacific railroads announced their long rumored long negotiated plan to merge this merger would combine two primarily parallel operations along the southern corridor of southwestern united states the merger was opposed by the antitrust division of the justice department and was turned down by the interstate commerce commission this paper uses the framework provided by the u s department of justice merger guidelines and more recent data to analyze the competitive implications of the merger the author finds that a serious loss of competition would likely have followed from the merger resulting in large gross deadweight losses and much larger transfers from shippers to the merging railroads his analysis demonstrates the critical importance of three factors in evaluating the impact of a merger such as this one a careful location and commodity specific analysis of the loci of likely competitive harm an unbiased estimate of those operating savings promised by the merger which could not be obtained through means less anticompetitive and a careful judgment as to the importance or lack of importance of transfers in the calculation of welfare losses thus an overall welfare calculus requires not only an accurate estimate of the efficiencies resulting from the merger but also a judgment as to the welfare relevance of wealth transfers

optimal control of externalities in the presence of income taxation a substantial literature examines second best environmental policy focusing particularly on how the pigouvian directive that marginal taxes should equal marginal external harms needs to be modified in light of the preexisting distortion due to labor income taxation additional literature is motivated by the possibility that distributive concerns should amend the internalization prescription it is demonstrated however that simple first best rules unmodified for labor supply distortion or distribution are correct in a natural basic formulation of the problem specifically setting all commodity taxes equal to marginal harms and subsidies equal to marginal benefits can generate a pareto improvement likewise a marginal reform in the direction of the first best can yield a pareto improvement qualifications and explanations for differences from previous work are also presented

how to make a carbon tax reform progressive the role of subsistence consumption this letter analyzes the distributional effects of a carbon tax reform when households must consume carbon intensive goods above a subsistence level the reform is progressive if revenues are recycled as uniform lump sum transfers in other cases it is regressive

the curious attraction of wagner s law wagner s law of increasing state activity has recently been subjected to intensive use of recondite econometric testing procedures an examination of the relevant articles reveals ignorance both of wagner s definition of state activity and of his insistence that he was not engaged in prediction consequently the omission of public enterprises contained in wagner s definition leads to a model misspecification and the object of testing his hypothesiss remains obscure

output and attribute based carbon regulation under uncertainty abstract output based carbon regulations such as fuel economy standards and the rate based standards in the clean power plan create well known incentives to inefficiently increase output similar distortions are created by attribute based regulations this paper demonstrates that despite these distortions output and attribute based standards can always yield strictly greater expected welfare than flat emission standards given uncertainty in demand for output or attributes assuming locally constant marginal damages for fuel economy standards the welfare maximizing amount of attribute or mileage basing is likely small relative to current policy for the electricity sector however an intensity standard may yield greater expected welfare than a flat standard

persistence in government spending fluctuations new evidence on the displacement effect in spite of peacock and wiseman s 1961 nber study demonstrating the displacement effect simplistic theoretical and empirical distinctions between temporary and permanent spending are common in this paper impulse response functions from arma models as well as cochrane s non parametric method support peacock and wiseman s conclusion by showing 1 government spending in the aggregate displays strong persistence to temporary shocks 2 simple decomposition methods intended to yield a temporary spending series have a weak statitistical foundation and 3 persistence in spending has increased during this century also as a basic fact of government spending behavior the displacement effect lends support to interest group and bureaucracy models of government spending growth

externalities and optimal taxation this paper reexamines the optimal tax design problem income and commodities in the presence of externalities the nature of the second best and the choice of the tax instruments are motivated by the informational structure in the economy the main results are i environmental levies linear or nonlinear differ in formula from pigouvian taxes by the expressions for the optimal tax on private goods ii externalities do not affect commodity tax formulas linear and nonlinear for private goods iii externalities do not affect the income tax structure if commodity taxes are nonlinear and affect it if commodity taxes are linear and iv a general income tax plus strictly pigouvian taxes are sufficient for efficient taxation if individuals of different types have identical marginal rates of substitution at any given consumption bundle

wagner s law versus displacement effect abstractthe public sector has grown dramatically over the past few centuries in many developed countries in this article we use wavelet methods to distinguish between two leading explanations for this growth wagner s law and the displacement effect in doing so we use the long term data of 10 oecd countries for a maximum time span of 1800 2009 we find that the validity of wagner s law is likely to vary strongly over time for each country a roughly similar feature in most of the countries is that the law is less valid in the earliest stage of economic development as well as in the advanced stages with the validity tending to follow an inverted u shaped pattern with economic development further our results indicate that the long run growth of government size cannot be adequately explained by wagner s law on the other hand the displacement effect appears to account for the bulk of the growth in most of the countries

direct versus indirect taxation the design of the tax structure revisited this article studies the optimal direct indirect tax mix problem when individuals differ in several unobservable characteristics productivity and endowments it presents general expressions for the optimal commodity tax rates and proves that contrary to atkinson and stiglitz s 1976 result differential commodity taxation remains a useful instrument of tax policy even if preferences are separable between labor and produced goods when cross substitution effects are zero the expressions resemble traditional many households ramsey rules in a cobb douglas illustration where endowments differ only in good 1 interpreted as wealth the tax on good 2 provides an indirect way to tax the unobservable wealth

simulating the effects of railroad mergers the purpose of the study reported in this paper is to add to the empirical literature concerning market power and competition between railroads in particular the paper examines the effect of railroad mergers on railroad market power this is achieved through a case study of the transportation market for the export of kansas wheat to houston texas the models techniques and general conclusions of the study can be applied to similarly situated regional transportation markets for homogeneous goods such as coal ores field crops and lumber two models are developed to achieve the objectives of the study a network model of the wheat logistics system is used to identify the least cost transportation routes from the kansas study area to the market at houston a profit improvement algorithm which identifies nash equilibrium prices is developed to measure the amount by which railroads can profitably raise their prices above variable cost the results of the study have implications for united states railroad merger policy the paper indicates that railroad mergers do not necessarily increase railroad market power or make railroad shippers worse off instead the study demonstrates that the impact of railroad mergers on shippers and railroads depends on factors that vary geographically such as the degree of intrarailroad and intermodal competition in the area

the displacement effect in the growth of governments we analyze the displacement effect within a multivariaterevenue expenditure model of government growth based on along historical dataset for italy our long run analysisshows a permanent influence of domestic product on the growthof governments supporting wagner s law the short rundynamics are more complex and provide some evidence for thedisplacement effect in terms of a lower resistance againsttax financing of government spending in the post war inaddition government spending adjusts faster when deviationsfrom its equilibrium get larger

the desirability of commodity taxation under non linear income taxation and heterogeneous tastes abstract this paper revisits the atkinson stiglitz result on uselessness of commodity taxation in the presence of optimal non linear income taxation in a more general setup namely when tastes are heterogeneous this general analysis displays the key economic assumptions under which the atkinson stiglitz result is robust a small tax on a given commodity is desirable if high income earners have a relatively higher taste for this commodity or if consumption of this commodity increases with leisure an application to the case of savings suggests that even in the presence of optimal non linear earnings taxation there is a role for a supplemental capital income tax in the standard overlapping generation model

an enlarged definition of cointegration abstract a broader definition of cointegration is presented allowing for different orders in the original process as a result different cointegration vectors may be generated from a given one however if the cointegrated process is stationary then the standard ideas and methods may still apply

should the good and the selfish be taxed differently in this paper we consider an environment where individual actions have externalities and two types of agents exist agents with social preferences the good and selfish agents selfish agents have pay off functions that do not take into account social welfare the pay off of an agent is a linear combination of social welfare and the pay off of a selfish agent we demonstrate that the corrective tax rates that maximize social welfare do not depend on the degree of social preferences hence the good and the selfish should not be taxed differently

optimal dynamic carbon taxes in a climate economy model with distortionary fiscal policy how should carbon be taxed as a part of fiscal policy the literature on optimal carbon pricing often abstracts from other taxes however when governments raise revenues with distortionary taxes carbon levies have fiscal impacts while they raise revenues directly they may shrink the bases of other taxes e g by decreasing employment this article theoretically characterizes and then quantifies optimal carbon taxes in a dynamic general equilibrium climate economy model with distortionary fiscal policy first this article establishes a novel theoretical relationship between the optimal taxation of carbon and of capital income this link arises because carbon emissions destroy natural capital they accumulate in the atmosphere and decrease future output consequently this article shows how the standard logic against capital income taxes extends to distortions on environmental capital investments second this article characterizes optimal climate policy in sub optimal fiscal settings where income taxes are constrained to remain at their observed levels third this article presents a detailed calibration that builds on the seminal dice approach but adds features essential for a setting with distortionary taxes such as a differentiation between climate change production impacts e g on agriculture and direct utility impacts e g on biodiversity existence value the central quantitative finding is that optimal carbon tax schedules are 8 24 lower when there are distortionary taxes compared to the setting with lump sum taxes considered in the literature

horizontal concentration and anticompetitive behavior in the central canadian cement industry testing arbitrage cost hypotheses abstract consider a market with a small number of firms attempting to collude if they successfully act as a dominant firm they will raise price this in turn will expand output by any fringe firms and thus reduce the market share of the colluding group thus higher prices will decrease concentration over time here we test this hypothesis using a modification of spiller and huang 1986 and data from the post 1974 toronto cement market the weight of the evidence indicates that market price has a negative effect on concentration implying that the firms in this market act with significant though limited success as a cartel

on the ir relevance of distribution and labor supply distortion to government policy should the assessment of government policies such as the provision of public goods and the control of externalities deviate from first best principles to account for distributive effects and the distortionary cost of labor income taxation for example is the optimal extent of public goods provision smaller than indicated by the samuelson rule because finance is distortionary or should environmental regulations fail to internalize externalities fully if the incidence of the regulations is regressive it is suggested that these questions are best addressed by considering distribution neutral implementation in which budget balance is achieved by choosing an adjustment to the income tax that offsets the distributive impact of the policy in question in basic cases both distribution and labor supply distortion are moot because the target policy and the tax adjustment produce offsetting effects on each thus traditional first best principles provide good benchmarks for policy analysis after all moreover even when actual implementation will not be distribution neutral in aggregate distribution neutral policy analysis has many conceptual and practical virtues that render it quite useful to investigators

minimum wage policy with optimal taxes and unemployment abstract using a search model i derive a formula that links the welfare gains from the minimum wage to its effect on low skilled labor force participation and employment this formula shows that the minimum wage is welfare improving if pushing the low skilled labor market tightness downwards brings it closer to its efficient level i estimate the causal effect of the minimum wage on low skilled labor force participation and employment using federal and state minimum wage variation i discuss the policy implications of my estimates when viewed through the lens of the marginal welfare gain formula

studying the role of political competition in the evolution of government size over long horizons here we argue for the use of cointegration and error correction analysis to combine economic factors that are nonstationary with political factors that are stationary into an empirical model of the evolution of public policy over long periods the approach is applied to disentangle the contributions of economics and politics to the evolution of public expenditure by the government of canada over 130 years political competition emerges as the primary political factor affecting government size

competition and rail rates for the shipment of corn soybeans and wheat this article investigates the extent and importance of rate competition among railroads for the export shipment of three narrowly defined agricultural commodities since passage of the staggers rail act of 1980 which increased the railroads freedom to set rates i construct measures of intermodal and intramodal competition and find that each has strong impacts on rail rates the farther a shipper is from competing water transportation the more considerably rates rise rates fall as railroad competition in a region increases there appears to be some interaction between intermodal and intramodal competition i find that the competitive effects of two proposed rail mergers depend on the vigor of intermodal competition from truck and water transport and on the change in interrailroad competition that results from the reduced number of competing rail systems

imperfect competition in multiproduct food industries with application to pear processing agricultural product markets often involve relatively few firms processing a farm product into multiple processed products this market structure prompts concern that processing firms may exercise both oligopsony and oligopoly power the present paper develops and applies a methodology to test simultaneously for market power in both the raw input market and multiple processed output markets application of the methodology to california pear processing indicates the industry has exerted power in both its farm input market and the markets for canned pears and fruit cocktail

substituting pollution taxation for general taxation some implications for efficiency in pollutions taxation abstract earlier papers have recognized that nonenvironmental benefits will be realized if pollution taxes are substituted for other taxes which impose efficiency losses on society the purpose of this paper is to investigate the importance of these nonenvironmental benefits for the design of an efficient pollution tax it is found that the efficient tax may be higher or lower than that conventionally defined as optimal and that the net benefit from unrestrained pollution can have important implications for the size of the tax

when environmental and redistribution concerns collide the case of electricity pricing abstract countries worldwide face major income inequality and environmental challenges however recent social upheavals reveal the conflict of interests induced by policies designed to address these concerns one example relates to residential electricity where volumetric grid charges and taxes may impede the affordability of electricity we develop and calibrate a model that captures the social planner s trade off between inequality aversion and environmental concerns we employ panel data on 105 000 households in the swiss canton of bern from 2008 to 2013 including electricity consumption household income and tax payment characteristics the results show that with inequity aversion and no negative environmental externalities electricity consumption should be subsidised by income tax revenue with negative environmental externalities or asymmetric information between the government and the utility end user electricity prices are shifted upwards for high degrees of inequality aversion the optimal electricity end user price is below the marginal cost even in the presence of negative environmental externalities

the regulatory transition a number of regulated industries particularly in transportation and communications have recently undertaken the transition from a regime of rigid price and entry controls to that of a more competitive market structure while the different industries have experienced somewhat different fates the responses to this transition do have certain common underlying characteristics to start demands for some form of temporary or continuing regulation during the transition to deregulation can be explained almost entirely as a response to the strength of the entry threat relative to the magnitude of sunk costs incurred by the affected parties in the previous regulatory regime where the obstacles to entry are low the incumbent firms and labor ordinarily seek protective conditions during the transition to permit them to recover some or all of their sunk costs when the obstacles to entry are high customers are likely to make similar demands for protective conditions designed to do the same particularly when the customers own sunk costs severely restrict their competitive options after deregulation pleas for protective conditions during the transition are widely regarded as introducing market imperfections that should be resisted in the name of regulatory reform this view however naively equates the market results during the transition when choices are constrained by the presence of sunk costs to the results that would prevail in a long run equilibrium where deregulated prices and quantities are established in the absence of most or any sunk costs the regulatory problem during the transition is to define a set of residual hopefully self terminating economic constraints that will satisfy the equity and other considerations created by the shortto medium term continuation of some sunk costs without creating insurmountable obstacles to approaching an efficient competitive outcome in the long run any transition mechanism must thus come to grips with the essence of the transition problem from a political as well as an economic perspective who is to bear the consequences of the overhang of sunk costs note that we are not making a generalized plea for the compensation of losers from deregulation especially for windfall gains conferred by the regulatory process itself see kenneth gordon 1981 rather the transition problem is defined here to be a limited period in which participants in the regulatory game are permitted to amortize financial commitments made under the prior set of rules while other participants are constrained in their ability to exploit the presence of those sunk costs during the transition misunderstanding or failing to recognize this transition problem can pose substantial dangers specifically premature application of economic concepts that while arguably valid in some future regime in which all sunk costs are amortized decidedly do not account for the effect of these sunk costs on the marketplace in the short run misunderstandings of the transition problem may also encourage false conclusions about the eventual results of deregulation that is the long run competitive equilibrium and industry structure that will emerge as a consequence policy recommendations designed to address the problems of the transition may tdiscussants robert willig princeton university thomas moore hoover institution

the behavior of us public debt a nonlinear perspective abstract this letter provides strong evidence of nonlinear mean reversion in the us debt gdp ratio using data since 1916 and shows that the difficulty to detect mean reversion encountered by a number of researchers may be due to the invalid maintained hypothesis of linearity which is common to the testing procedures employed in this context

marginal welfare cost calculations differential analysis vs balanced budget analysis abstract in a differential analysis tax revenue collections are held constant in a balanced budget analysis the spending level is changed and the level of distortionary taxation is changed correspondingly here income effects are important and efficiency calculations depend chiefly on uncompensated elasticities unless government exhaustive expenditure is assumed to substitute closely for cash a small scale computational general equilibrium model is constructed and differential and balanced budget experiments are performed results show that marginal welfare costs calculated from balanced budget experiments can be negative when labor supply functions are backward bending interactions among parameter values and efficiency costs are explored

in praise of frank ramsey s contribution to the theory of taxation frank ramsey s brilliant 1927 paper modestly entitled a contribution to the theory of taxation is a landmark in the economics of public finance nearly a half century later through the work of diamond and mirrlees 1971 and mirrlees 1971 his paper can be thought of as launching the field of optimal taxation and revolutionising public finance ramsey f p 1927 a contribution to the theory of taxation economic journal vol 37 145 pp 47 61

redistribution and pollution taxes with non linear engel curves abstract this paper analyses optimal corrective taxation and optimal income redistribution the pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages moreover under general utility functions optimal pollution taxes should be set below the pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods however if engel curves are linear optimal pollution taxes should follow the first best rule for the pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods the often used quasi linear ces and stone geary utility functions all have linear engel curves if engel curves are linear and if pollution taxes are not optimised pareto improving green tax reforms exist that move the pollution tax closer to the pigouvian tax simulations demonstrate that optimal corrective taxes should be pigouvian if the demand for polluting goods is derived from a les demand system but deviate from the pigouvian taxes if demand for polluting goods demand is derived from a piglog demand system

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 marginal efficiency effects of taxes and subsidies in the presence of externalities a computational general equilibrium approach abstract using 1983 data we develop a 19 sector computational general equilibrium model incorporating producer producer externalities and producer consumer externalities simulation results indicate that when additional government expenditure is financed by pigouvian taxes the marginal cost of public funds is substantially below one labor sales and output taxes also affect the output of the polluting industries and thus have indirect pigouvian effects which tend to reduce the associated marginal costs of public funds pigouvian taxes are usually more efficient than pigouvian subsidies since the tax revenue can be used to reduce other taxes

taxing externalities under financing constraints we consider an economy where production generates externalities which can be reduced by additional firm level expenditures this requires firms to raise outside financing leading to deadweight loss due to a standard agency problem vis a vis outside investors policy is constrained as firms are privately informed about their marginal cost of avoiding externalities we first derive the optimal linear pollution tax which is strictly lower than the pigouvian tax for two reasons first higher firm outside financing creates additional deadweight loss second through redistributing resources in the economy a higher tax reduces average productive efficiency we analyze various instruments that achieve a more efficient allocation in particular nonlinear pollution taxes which can no longer be implemented through a tradable permit scheme alone and grants tied to loans which are frequently observed in practice