Regulation versus Taxation


Alesina, Alberto, and Francesco Passarelli. 2014. “Regulation versus Taxation.” Journal of Public Economics 110: 147-156.
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We study which policy tool and at what level a majority chooses in order to reduce negative externalities, such as pollution. We consider three instruments: a rule that sets an upper limit to the activity which produces the negative externality, a quota that forces a proportional reduction of the activity, and a proportional tax on it. For all instruments the majority chooses levels which are too restrictive when the activity is performed mainly by a small fraction of the population, and when costs for reducing activities or paying taxes are quite convex. Also, a majority may choose an instrument that is different than what a social planner would choose; for instance, a rule when the social planner would choose a tax.

Last updated on 02/18/2014