Efficiency Versus Equity in Petroleum Taxation

Abstract

This paper presents a new approach to the economic analysis of energy policy. The objective is to provide an ordering of alternative energy policies, in which the most desirable energy policy is the one yielding the highest level of social welfare. This principle can be used to evaluate a specific policy change or select the best policy from a set of alternatives. The authors' measure of social welfare is defined on the distribution of individual welfare, which is specified in terms of households as consuming units. They introduce a money metric for social welfare based on total expenditure. Using this metric, energy policies can be compared in terms of the amount of money required to attain the level of welfare associated with each policy. The money measure of social welfare consists of money measures of efficiency and equity. To illustrate the measurement of social welfare, the authors compare alternative policies for taxation of petroleum production in the US. 19 references, 4 tables.