Public-Private Pollution Abatement : A Re-Examination Based on Indirect Tax Reforms

The present paper focuses on earmarking of taxation to pay for public pollution abatement within the context of trade and domestic tax reforms. We identify situations in which an increase in public abatement only increases welfare by more than that in private abatement only. We also show that partial abatement policies can improve welfare by more than full abatement policies—an increase in both private and public abatement. The paper also introduces the price/quantity debate into the indirect tax reform analysis. It is shown that price control methods, albeit standard in the tariff-tax reform literature, are inferior to quantity control methods in terms of welfare improvements. The reverse is true in case of reforming export taxes and production taxes. Under quantity control measures, governments need not increase tax rates to undo any negative repercussions on public abatement activities. Rather, they need to preserve the level of private consumption via changes in the degree of earmarking