Journal of Risk & Control

Environmental Regulation Modeled as a Public Input Proportional to Capital Investment

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  • Abstract


    Public inputs, when referred to as unpaid factors, are included in production specifications characterized by constant returns to scale in all inputs. In equilibrium, the public input rent generated by this configuration must be allocated among firms based on some measure of productive activity. Herein, decentralized environmental regulation is modeled as a public input of the unpaid type. Environmental rent is then rationed to private firms in proportion to their capital investment. Results reveal that source based capital taxation will capture these environmental rents, however, will not yield efficiency in the devolved interjurisdictional framework. The capital tax must be complemented by benefit taxation in order to provide efficient local public expenditures and socially optimal levels of environmental quality.


    JEL classification numbers: H42, H54, H71.

    Keywords: Environmental federalism, Capital tax, Public inputs, Efficiency.