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2.2.1. Efficiency Gains from Environmental Pollution Fees

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Savings from Economic Incentives


In those cases where the economic incentive used is a payment to the government for pollution discharges, there is an added efficiency gain to the extent that the revenue gathered offsets revenue that would otherwise be gathered through other forms of taxation. Almost all other forms of taxation result in lower levels of activity for those activities that are taxed, with resulting economic losses. For example, the income tax results in less income-producing activity because the rewards to the producer are reduced by the amount of the tax. On the other hand, environmental fees, while reducing pollution producing activities, increase efficiency if set so as to produce an economically efficient level of pollution. Some estimates of the efficiency gains from shifting from other taxes to environmental pollution fees are quite large. [For a brief summary of the literature, see Repetto et al (1992)].

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