Guns, Latrines, and Land Reform: Dynamic Pigouvian Taxation


Kremer, Michael, and Jack Willis. “Guns, Latrines, and Land Reform: Dynamic Pigouvian Taxation.” American Economic Review Papers and Proceedings 106, no. 5 (2016): 83-88.
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Date Published:

May 2016


Dynamically and statically optimal Pigouvian subsidies and taxes on durables will differ in a growing economy. In a dynamic game, consumers may delay purchasing durables with positive externalities, such as latrines, anticipating greater future subsidies. Governments can most cheaply induce optimal purchasing by committing to make subsidies temporary. The presence of multiple subsidizing bodies, including foreign donors, may make commitment impossible, generating delays in private investment that more than fully offset the social benefits of transfers. For durables with negative externalities, such as guns, anticipated future taxes or regulation may encourage current purchase, potentially causing policymakers who would otherwise prefer taxes or regulation to abandon such policies. Political actors may also be able to shape others’ policy preferences by changing private expectations. For example, a political party that announces an intent to redistribute land may reduce investment incentives for current owners, thus reducing the benefits of maintaining existing property rights and making land reform more attractive to the median voter.

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Last updated on 11/28/2016