A presumptive pigovian tax on gasoline : analysis of an air pollution control program for Mexico City

Without continuous monitoring of emissions, a pollution control agency needs to evaluate abatement options itself. Apart from making activities cleaner, it should also stimulate reductions in the level of activity in polluting sectors. The author develops an analytical framework to show that a tax on a variable input, such as gasoline, is useful for this purpose. It encourages individuals and firms to sacrifice trips when they would prefer those sacrifices to those of higher spending on abatement. The instrument exploits privately held information about which trips can be saved at a low social cost. Other weaknesses of a program based on indirect instruments - as opposed to one induced by a theoretically conceived pollution tax - remain. One of these is that the agency may have poorer information than individuals and firms about the status of vehicles and the effectiveness of individual abatement options. Such an information gap - which could be bridged by a true pollution tax - is abstracted from the analysis. The author shows that the tax rate that belongs in a cost-effective pollution control program is independent of the price elasticity of demand for the polluting good. But the higher the demand elasticity, the higher are the costs of not including a presumptive tax on the polluting good in the tool kit of the pollution control agency. The author estimates the cost savings available when an optimal gasoline tax is included in an otherwise well-composed program, appropriately accounting for the welfare costs ofdemand consumption. He shows that the targeted emission reductions can be obtained at 11 percent lower costs, saving $64 million annually, when the demand conservation induced by the gasoline tax allows some other, more expensive abatement options to remain unused. He proposes an ad valorem gasoline tax of about 25 percent, when no separate value is associated with the collection of revenue or with avoidance of noise, congestion, accidents, and road damage. In Mexico City alone, the tax would collect$350 million a year. After recent price increases, implicit tax rates in Mexico City are higher than suggested by the author's analysis. Higher rates may or may not be justified due to the benefits of demand conservation not accounted for in the analysis.Energy and Environment,Pollution Management&Control,Environmental Economics&Policies,Economic Theory&Research,Transport and Environment

Environmental protection and optimal taxation

Struck by the fact that economists did not have a plausible model for why emissions standards, and mandated technologies, play a dominant role in pollution control, the author sought answers to two questions: 1) Should one stimulate emissions reductions by firms, and households, rich and poor, in the same way? 2) How should one combine instruments that make activities cleaner, with instruments that shift the economy toward less-polluting activities? Using clean air as an example of a pure public good, he shows the role of emissions taxes, or such surrogate instruments, as emissions standards, and presumptive Pigouvian taxes. To illustrate the combination of demand management, and technical controls, he computes a marginal cost curve for emissions reductions in the form of cleaner cars, and fuels. And he estimates a demand model for cars, and driving. The result: under the assumption that revenue, and re-distributive transfers bear no premia, the cost of reducing pollution in Mexico City increases forty four percent if an emissions standards program is used, and the presumptive Pigouvian tax on gasoline is not. The important finding, as costly redistribution, and revenue generation are introduced, is that this influences the general scheme of taxation (in well-known ways), and it influences the conditions for optimal environmental quality in accordance with Pigou's conjecture. However, it does not change, or invalidate the rankings of technologies, and interventions on the control cost curve, nor does it change the role of demand management in environmental protection.Environmental Economics&Policies,Energy and Environment,Pollution Management&Control,Economic Theory&Research,Carbon Policy and Trading

Autonomy, participation, and learning in Argentine schools - findings andtheir implications for decentralization

According to a theoretical model, school autonomy and parental participation in schools, can increase student learning through separate channels. Greater school autonomy increases the rent that can be distributed among stakeholders in the school, while institutions for parental participation (such as school board) empower parents to command a larger share of this surplus - for example, through student learning. Using a rich cross-sectional data set from Argentine schools (sixth and seventh grades), the authors find that autonomy, and participation raise student test scores for a given level of inputs, in a multiplicative way, consistent with the model. Autonomy has a direct effect on learning (but not for very low levels of participation), while participation affects learning only through the mediation of the effect of autonomy. The results are robust to a variety of robustness checks, and for sub-samples of children from poor households, children of uneducated mothers, schools with low mean family wealth, and public schools. It is possible that autonomy, and participation are endogenously determined, and that this biases the results - the data available do not allow this to be ruled out with certainty. Plausible predicators of autonomy, and participation are also plausible predicators of test scores, and they fail tests for the over-identifying restrictions. Heuristically argued, however, the potential for correlation with unobserved variables may be limited: the data set is rich in observed variables, and autonomy and participation show very low correlation with observed variables. Subject to these caveats, the results may be relevant to decentralization in two ways. First, as decentralization moves responsibility from the central, toward the provincial or local government, the results should be directly relevant if the decentralization increases autonomy, and participation in schools. Second, if the results are interpreted as representing a more general effect of moving decision-making toward users, and the local community, the results are relevant even if little happens to autonomy, and participation in schools. More important, perhaps, the authors illustrate empirically the importance of knowing who is empowered when higher levels of government loosen control.Politics and Government,Teaching and Learning,Primary Education,Decentralization,Economic Theory&Research,Teaching and Learning,Primary Education,Politics and Government,ICT Policy and Strategies,Health Monitoring&Evaluation

Trading for the Future: Signaling in Permit Markets

Tradable permits are celebrated as a political instrument since they allow (i) firms to equalize marginal abatement costs through trade and (ii) the government to distribute the burden of the policy in a politically fair and feasible way. These two concerns, however, conflict in a dynamic setting. Anticipating that high-cost firms will receive more permits in the future, firms purchase excessive amounts of permits to signal high costs. This raises the price above marginal costs and distorts abatements. In fact, it is better with non-tradable permits if the heterogeneity between the firms is small, if the (shadow) price for permits is large, and if the government redistributes permits frequently.Tradable permits, private information, signaling

Corruption under moral hazard

In this theoretical analysis, the"principal"can be the head of the tax collection agency (or"government"or even citizens), the"supervisor"can be the tax collector, and the"agent"can be the taxpayer. The principal, interested in controlling an agent's socially costly activity ("cheating"), hires the supervisor to save on monitoring costs. The agent may bribe the tax collector to suppress reporting, but bribery can be eliminated by the agency head if he institutes enough investigations and sets rewards high enough and penalties steep enough. When penalties and rewards are constrained, some corruption will exist even under a rational approach to pursuing the agency's objectives. Anti-corruption efforts will have higher costs than benefits unless they successfully address these constraints. The agency's implementation costs, and thus the scope for corruption, are defined by constraints on penalties and rewards relative to costs of monitoring and investigation. For example, if the agency head is extremely handicapped in his ability to detect bribery (by a high burden of proof and cost of investigation, and a civil service pay scale that is too flat and rigid), he cannot really reward good employees or make dishonest employees suffer. The analysis assumes that the principal can commit in advance to a certain likelihood of being caught engaging in bribery. Creating an independent anti-corruption commission (like those in Hong Kong and New South Wales) may be interpreted as a way of making such a commitment. In Hong Kong two-thirds of reports to the commission are made in full name, an indication that it has attained a reputation for independence and efficiency. The"whistleblower act"in the United states (promising rewards and protection for informants), as well as separation of powers and independent courts, also function as commitment. Corruption exists not only in poorly designed but also in sophisticated systems. It can profitably be reduced only by improving general incentives. Advances in courts, investigations, freedom of the press, and flow of information can allow more performance-based rewards and penalties.Environmental Economics&Policies,Economic Theory&Research,Corruption&Anitcorruption Law,Public Sector Corruption&Anticorruption Measures,Banks&Banking Reform

Trading for the Future: Signaling in Permit Markets

Permits markets are celebrated as a policy instrument since they allow (i) firms to equalize marginal costs through trade and (ii) the regulator to distribute the burden in a politically desirable way. These two concerns, however, may conflict in a dynamic setting. Anticipating the regulator's future desire to give more permits to firms that appear to need them, firms purchase permits to signal their need. This raises the price above marginal costs and the market becomes inefficient. If the social cost of pollution is high and the government intervenes frequently in the market, the distortions are greater than the gains from trade and non-tradable permits are better. The analysis helps to understand permit markets and how they should be designed.Tradable permits; time inconsistency; the ratchet effect; rent-seeking; plan vs. market

Choosing policy instruments for pollution control : a review

This paper presents the design of cost effective interventions to protect the environment from excessive pollution in developing countries. The concept of intervention is motivated by the typical explanation for environmental problems in economic theory--external effects. The aim of the paper is to review the relevant theoretical and empirical economic literature in order: (a) to distill the principal lessons and evaluate general rules of thumb; and (b) to identify gaps that need to be filled in order to make them more accessible and relevant to developing countries. The paper defines broadly the range of policy instruments that can be used to address pollution problems in developing countries. It includes instruments that have traditionally been in the realm of public finance, such as taxes, prices and subsidies. But it also covers regulations and other instruments designed to affect the amount of pollution or to mitigate its damage. To limit the scope of this paper, the authors treat pollution control policies, but not policies to address other environmental problems, such as soil erosion, deforestation, desertification or other natural resource problems. Many of the principles presented, however, broadly relate to the problem of correcting for external effects, and can be applied to these other problems as well. It also focuses on domestic problems and does not deal explicitly with trans-national or global pollution externalities.Economic Theory&Research,Water and Industry,Health Monitoring&Evaluation,Pollution Management&Control,Environmental Economics&Policies

Acting Globally while Thinking Locally: Is the Global Environment Protected by Transport Emission Control Programs?

Locally motivated air quality programs in Santiago and Mexico City have only minor collateral benefits for the global climate. If agencies with global and local agendas did business together, then individuals and firms and even cities would act globally when thinking locally, and one would see greater synergy. Eskeland and Xie find that locally motivated air quality programs for urban transport have limited collateral benefits in terms of protecting the global climate. This could puzzle some, since these two public goods one global, one local seem to be jointly produced. However, air quality in Mexico City, Santiago, and elsewhere is predominantly pursued by technical improvements (making cars and fuels cleaner), and not by reducing demand for polluting goods and services (though in Europe high fuel taxes help reduce demand). Control programs developed under joint stimulus to protect the global and local environment have not yet been seen, and they may surprise us when they come. However, they will likely rely more on reducing demand, using instruments such as corrective (Pigovian) taxes on fuels. The authors show how, if locally and globally charged agencies can do business together, consumers, producers, and cities will act globally when thinking locally. Only then will we know the extent to which local and global benefits are produced jointly.

Travel mode substitution in Sao Paulo : estimates and implications for air pollution control

How would travel demand in Sao Paulo respond to demand management instruments? Could higher gasoline prices or lower metro fares (or changes in travel time) help reduce congestion or pollution? The authors use cross-sectional variation from an urban travel survey to study the substitutability in demand between travel modes. The method assumes that the set of trips is given (that is, origin-destination pairs do not change). Choice of mode was found to be quite insensitive to changes; all elasticities were lower than 0.5 in absolute value, and most were close to zero. While the sensitivity of mode choice to relative travel times (that is, speeds) was somewhat greater than that to costs, the general finding is that mode choice is quite inflexible. So, subsidies to less polluting (less congesting) travel modes would not help much in attracting travelers from more polluting (more congesting) modes. (The same holds for subsidized means of making them run faster.) But there are important limitations in the scope of the study. First, the study does not discuss optimal pricing. It merely examines the likely sign and magnitude of the links between pollution and policy parameters such as prices and travel speeds. Second, aggregate demand by mode could also depend on the city's shape and its travel intensity (the number, direction, and length of trips). For example, if a"city"stretches along a constructed metro line, the study would not capture such a phenomenon, since sensitive trip generation is excluded. These issues are not examined in the study.Roads&Highways,Consumption,Economic Theory&Research,Environmental Economics&Policies,Transport Economics Policy&Planning,Roads&Highways,Economic Theory&Research,Urban Transport,Environmental Economics&Policies,Transport and Environment

Rationing can backfire : the day without a car in Mexico City

In November 1989, Mexico City's administration imposed a regulation banning each car from driving on a specific day of the week. The regulation has been both popular and controversial. Some feel that it is a reasonable concession aimed at alleviating congestion and pollution problems. Others feel it is both inefficient and unfair: inefficient in the way most rationing systems are inefficent, and unfair in that it is costly to some and easily avoided or accommodated by others. Some feel that it may also be so inefficient that it is counterproductive. The authors found evidence to support that view. Many households bought an additional car to get additional driving permits, and the amount of driving increased. Greater use of old cars and increased weekend driving may have contributed to the disappointing results of Mexico's one-day ban on driving: high welfare costs and none of the intended benefits.Roads&Highways,Economic Theory&Research,Environmental Economics&Policies,Financial Crisis Management&Restructuring,Country Strategy&Performance,Economic Theory&Research,Environmental Economics&Policies,Roads&Highways,Financial Crisis Management&Restructuring,Transport and Environment