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Sufficient Statistics for Imperfect Externality-Correcting Policies

Author

Listed:
  • Mark R. Jacobsen
  • Christopher R. Knittel
  • James M. Sallee
  • Arthur A. van Benthem
Abstract
Pigouvian taxes can fully correct for market failures due to externalities, but actual policies are commonly forced to deviate from the Pigouvian ideal due to administrative or political constraints. This paper derives sufficient statistics, which require a minimum of market information, that quantify the efficiency costs of such constraints on policy design. We demonstrate that, under certain intuitive conditions, standard output from a regression of true externalities on policy variables, including the R2 and the sum of squared residuals, have immediate welfare interpretations—they are sufficient statistics that compare alternative policies. We utilize our approach in three diverse empirical applications: random mismeasurement in externalities, imperfect spatial policy differentiation, and heterogeneity in the longevity of energy-consuming durable goods. Regarding the latter, we use our method and a novel data set and find that policies that regulate vehicle fuel-economy, but ignore the differences in average longevity across types of automobiles, recover only about one-quarter to one-third of the welfare gains achievable by a policy that also takes product longevity into account. In contrast, our other two empirical applications suggest that policy imperfections have only small welfare costs.

Suggested Citation

  • Mark R. Jacobsen & Christopher R. Knittel & James M. Sallee & Arthur A. van Benthem, 2016. "Sufficient Statistics for Imperfect Externality-Correcting Policies," NBER Working Papers 22063, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22063
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    References listed on IDEAS

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    Cited by:

    1. Verboven, Frank & Grigolon, Laura & Reynaert, Mathias, 2014. "Consumer valuation of fuel costs and the effectiveness of tax policy: Evidence from the European car market," CEPR Discussion Papers 10301, C.E.P.R. Discussion Papers.
    2. Griffith, Rachel & O’Connell, Martin & Smith, Kate, 2019. "Tax design in the alcohol market," Journal of Public Economics, Elsevier, vol. 172(C), pages 20-35.
    3. Lucas W. Davis & Christopher R. Knittel, 2019. "Are Fuel Economy Standards Regressive?," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(S1), pages 37-63.
    4. Sandler, Ryan, 2018. "You can't take it with you: Appliance choices and the energy efficiency gap," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 327-344.
    5. Zhang, Da & Peng, Hantang & Zhang, Lin, 2023. "Share of polluting input as a sufficient statistic for burden sharing," Energy Economics, Elsevier, vol. 121(C).

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics

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