A Second-Best Analysis of Alternative Instruments for the Preservation of Natural Resources

Maria Llop

doi:10.3390/su12041562

Abstract

The literature on second-best environmental taxation provides us with a broad understanding of the welfare impacts of pollution regulation. However, most of the research undertaken to date has focused on environmental pollution, while other topics in environmental economics, such as the preservation of natural resources, have not warranted much attention in the optimal taxation literature. This paper uses a simple general-equilibrium model to analyze the welfare effects of taxes on final goods, taxes on natural resources, and extraction permits with a second-best approach based on the existence of initial distortionary taxes. This analysis not only takes into account the non-use utility of the mere existence of natural resources, but also captures the consequences of enjoying environmental goods on labor supply decisions, through the use-value attributed to natural resources. The comparison of the welfare impacts of a tax on final consumption and a tax on the use of natural resources is not conclusive. A consumption tax leads to a higher primary welfare effect than a resources tax, while taxing natural goods generates more revenue-recycling income than taxing consumption goods. In addition, as extraction permits do not generate new public revenues to reduce pre-existing distortionary taxes, this intervention entails the highest welfare costs.

Highlights

In the last three decades, researchers have become increasingly interested in analyzing environmental taxation in economies with pre-existing taxes and identifying the efficiency of different environmental policy instruments
The cornerstone of this body of research is the idea that pre-existing taxes raise the cost of environmental interventions and that this impact is not completely offset by the possible substitution of pre-existing taxes with new environmental taxes. This set of contributions highlights the existence of three differentiated welfare effects when a new environmental tax is implemented: the primary welfare effect, which is the direct impact of the new taxation on the environmental externality; the revenue-recycling effect, which captures the benefit of replacing pre-existing distortionary taxes with the new pollution taxes; and the cost-side tax-interaction effect, which measures the negative welfare impact of the price rises that is transmitted through the labor market by reducing the real wage and, discouraging labor supply [1,2,3,4,5,6]
The static framework has proven to be extremely useful for making in-depth studies of the welfare implications of environmental measures. By considering all these potentialities, this paper presents a static analysis of the alternative measures available for preserving natural resources and the welfare impacts involved

Summary

Introduction

In the last three decades, researchers have become increasingly interested in analyzing environmental taxation in economies with pre-existing taxes and identifying the efficiency of different environmental policy instruments. It uses the environmental general-equilibrium framework to study natural resources by defining a second-best setting in which there is an initial and distortionary tax on income It explores the welfare effects of the alternative measures available for correcting the negative impacts caused by the usage of natural resources (i.e., overexploitation and the possible negative externalities involved). It aims to capture some of the economy-wide implications of the non-market usages of natural resources by defining the trade-off between labor supply decisions and the use-value of ecosystem services. After presenting the policy implications of the analysis, the final section draws the conclusions

The Model

Tax on Final Goods

Tax on Natural Resources

Extraction Permits

Policy Implications and Empirical Evaluation

Conclusions