ABSTRACT
This chapter is prompted by the practical challenge of reducing air pollution from transport in a metropolitan area such as Mexico City while keeping an eye on the welfare costs of doing so. A least-cost solution to such a problem could involve behavioral change, such as modified travel patterns, as well as a number of technical modifications, whether in form of tune-ups and retrofitting of existing capital equipment or in the form of new configurations of machinery or improved fuels. The theory of optimal taxation has mainly been concerned with minimizing the distortionary costs of revenue-raising taxes. The broader normative public-finance literature has provided a case for an authoritative government and intervention through public expenditures, taxation, and regulation, with the two main rationales being market failure and concerns about income distribution. The model must not only allow for behavioral responses to policies that can influence demand, but must also provide a measure of the social costs of such demand manipulation.
