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The study builds a general equilibrium model with substitution in production and consumer demand, deriving second-best optimal tax rates on emissions or on output. Using parameter values, it estimates welfare impacts from small tax changes and quantifies the cost of missing the target, reflecting the welfare gains from properly targeted emission taxes that capture both substitution and output effects.",{"@graph":63,"@context":118},[64,80,101],{"@type":65,"itemListElement":66},"BreadcrumbList",[67,71,74,77],{"item":68,"name":69,"@type":70,"position":9},"https://docshare.wps.com","Home","ListItem",{"item":72,"name":10,"@type":70,"position":73},"https://docshare.wps.com/template/",2,{"item":75,"name":51,"@type":70,"position":76},"https://docshare.wps.com/template/general/",3,{"item":78,"name":59,"@type":70,"position":79},"https://docshare.wps.com/template/a-tax-on-output-of-the-polluting-industry-is-not-a-tax-on-pollution-the-importance-of-hitting-the-target/303091/",4,{"url":78,"name":59,"@type":81,"image":82,"author":87,"headline":59,"publisher":90,"fileFormat":93,"inLanguage":57,"description":61,"dateModified":94,"datePublished":95,"encodingFormat":93,"isAccessibleForFree":96,"interactionStatistic":97},"DigitalDocument",{"url":83,"@type":84,"width":85,"height":86},"https://docshare.wps.com/thumbnails/a-tax-on-output-of-the-polluting-industry-is-not-a-tax-on-pollution-the-importance-of-hitting-the-target/303091.png","ImageObject",442,249,{"name":88,"@type":89},"Well Done","Person",{"url":68,"name":91,"@type":92},"DocShare","Organization","application/pdf","2026-09-20","2026-09-19",true,{"@type":98,"interactionType":99,"userInteractionCount":73},"InteractionCounter",{"@type":100},"ViewAction",{"@type":102,"mainEntity":103},"FAQPage",[104,110,114],{"name":105,"@type":106,"acceptedAnswer":107},"Why is an output tax not the same as a tax on pollution?","Question",{"text":108,"@type":109},"Because a tax on output can induce substitution in production that reduces pollution per unit, while higher production costs also reduce output. The resulting incentives do not align perfectly with directly targeting emissions, so the tax may miss the target.","Answer",{"name":111,"@type":106,"acceptedAnswer":112},"What model does the paper use to evaluate welfare effects?",{"text":113,"@type":109},"It develops a simple analytical general equilibrium model that includes substitution in production and demand by consumers. The paper derives second-best optimal tax rates on emissions or on output based on preference, technological, and preexisting tax parameters.",{"name":115,"@type":106,"acceptedAnswer":116},"What reasons does the paper give for why actual policy misses the target?",{"text":117,"@type":109},"Policy may not fully appreciate the importance of hitting the target, emissions may be difficult to measure so taxes use correlated activities, and measurement technology improvements may lead policymakers to adjust the tax base slowly.","https://schema.org",{"og:url":78,"og:type":120,"og:title":59,"og:site_name":91,"og:description":61},"article",{"robots":122,"canonical":78},"index,follow",{"doc_id":124,"site_id":56},303091,1789799934,{"code":4,"msg":5,"data":127},{"doc_id":124,"user_id":128,"nickname":88,"user_avatar":129,"doc_module":9,"category_id":50,"category_name":51,"doc_title":59,"doc_description":61,"doc_content":130,"file_id":131,"file_url":132,"file_type":133,"file_size":134,"view_count":73,"is_deleted":4,"is_public":9,"is_downloadable":9,"audit_status":9,"page_count":135,"language":136,"language_code":57,"site_id":56,"html_lang":57,"table_of_contents":137,"faqs":138,"seo_title":139,"seo_description":61,"update_tm":125,"read_time":15},5909892210082,"https://ap-avatar.wpscdn.com/avatar/56001069da27c9f41e8?x-image-process=image/resize,m_fixed,w_180,h_180&k=1789614185077863061","This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research  \nVolume Title: Behavioral and Distributional Effects of Environmental Policy Volume Author/Editor: Carlo Carraro and Gilbert E. Metcalf, editors Volume Publisher: University of Chicago Press  \nVolume ISBN: 0-226-09481-2  \nVolume URL: [http://www.nber.org/books/carr01-1](http://www.nber.org/books/carr01-1)  \nConference Date: June 11–12, 1999  \nPublication Date: January 2001  \nChapter Title: A Tax on Output of the Polluting Industry Is Not a Tax on Pollution The Importance of Hitting the Target  \nChapter Author: Don Fullerton, Inkee Hong, Gilbert E. Metcalf  \nChapter URL: [http://www.nber.org/chapters/c10604](http://www.nber.org/chapters/c10604)  \n[Chapter pages in book:](Chapter pages in book:) (p. 13-44)  \n􀀂 A Tax on Output of the Polluting  \nIndustry Is Not a Tax on Pollution  \nThe Importance of Hitting the Target  \nDon Fullerton, Inkee Hong, and Gilbert E. Metcalf  \n1.1 Introduction  \nA tax per unit of pollution can induce all the cheapest and most efficient forms of pollution abatement (Pigou 1932) . To reduce its tax liability, the firm can switch to a less-polluting fuel, add a scrubber, change disposal methods, or otherwise adjust its production process. These methods of substitution in production reduce the pollution per unit of output. In addition, the tax raises the overall cost of production, so the higher equilibrium output price chokes off demand for the output. Thus the tax has a substitution effect that reduces pollution per unit, and an output effect that reduces the number of units.  \nYet few actual taxes are targeted directly on pollution (Barthold 1994) . Taxes on gasoline are prevalent around the world, and the use of gasoline is indeed correlated with vehicle emissions. This gas tax might provide some incentive to reduce emissions by driving less, but it provides no incentive to reduce emissions per gallon (such as by adding pollution-control equipment) . The United States taxes chemical feedstocks associated with contaminated Superfund sites, and this tax may help reduce pollution, but  \nDon Fullerton is professor of economics at the University of Texas at Austin and a research associate of the National Bureau of Economic Research. Inkee Hong is a doctoral candidate in the Department of Economics at the University of Texas at Austin. Gilbert E. Metcalf is professor of economics at Tufts University and a research associate of the National Bureau of Economic Research.  \nFor funding, the authors thank the National Bureau of Economic Research and the National Science Foundation (SBR-9811324) . For helpful suggestions, the authors thank Eliana de Bernardez Clark, Larry Goulder, Gilbert H. A. van Hagen, Rob Williams, and conference participants. This paper is part of the NBER’s Public Economics research program. The views expressed in this paper are those of the authors and do not reflect those of the National Science Foundation or the National Bureau of Economic Research.  \nit provides no incentive to use a cleaner production process, to avoid spills, or to use any other method of reducing pollution per unit of chemical input (Fullerton 1996) . In Europe, some industrial effluent taxes are calculated using an assumed industrywide rate of effluent per unit output, so the firm cannot reduce its tax by reducing its own effluent per unit (Hahn 1989) . These taxes miss the substitution effect.  \nIn this paper, we measure the welfare effect of improperly targeted instruments. We build a simple analytical general equilibrium model with substitution in production and demand by consumers, and we derive second-best optimal tax rates on emissions or on output. These rates are based on preference parameters, technological parameters, and preexisting tax rates. We discuss these optimal tax rates, and then we choose plausible values of the parameters to calculate the effects of a small change in each tax rate. For alternative initial conditio","cbCaiaSIAwXQiK1e","https://ap.wps.com/l/cbCaiaSIAwXQiK1e","pdf",193036,33,"English","# 1.1 Introduction\n## Substitution vs output effects of pollution taxes\n## Why taxes often miss the target","[{\"question\":\"Why is an output tax not the same as a tax on pollution?\",\"answer\":\"Because a tax on output can induce substitution in production that reduces pollution per unit, while higher production costs also reduce output. The resulting incentives do not align perfectly with directly targeting emissions, so the tax may miss the target.\"},{\"question\":\"What model does the paper use to evaluate welfare effects?\",\"answer\":\"It develops a simple analytical general equilibrium model that includes substitution in production and demand by consumers. The paper derives second-best optimal tax rates on emissions or on output based on preference, technological, and preexisting tax parameters.\"},{\"question\":\"What reasons does the paper give for why actual policy misses the target?\",\"answer\":\"Policy may not fully appreciate the importance of hitting the target, emissions may be difficult to measure so taxes use correlated activities, and measurement technology improvements may lead policymakers to adjust the tax base slowly.\"}]","A Tax on Output of the Polluting Industry Is Not a Tax on Pollution - The Importance of Hitting the Target | PDF"]