A Presumptive Pigovian Tax: Complementing Regulation to Mimic an Emissions Fee
This chapter discusses the practical challenge of reducing air pollution from transport in a metropolitan area such as Mexico City. It investigates the gains to be made from a less ambitious reform of a traditional program. The chapter develops the theoretical background for analyzing cost-effectiveness from the perspective of very simple, general equilibrium, welfare economics. It then applies the analytical framework to data from a program to contain pollution in Mexico City and examines how inclusion of a gasoline tax in the program would reduce costs of attaining the targeted emission reductions. In a traditional control program the planner undertakes costly efforts to estimate the costs of pollution control for various groups of vehicles and users. The use of a representative consumer can be justified by assuming that the effects of the air pollution control strategy on income distribution is not of major interest because, for instance, the planner can use other instruments that can cheaply transfer income between groups.