Lab Seminar: The Principle of Targeting and Environmental Benefits

Erica Chuang, Ph.D. candidate in the University of California San Diego Department of Economics, presented on principle of targeting for environmental externalities. Economists generally agree that in terms of tax and subsidy structure, Pigou is king. However, market-based instruments that imprecisely target externalities are common, and the degree to which imprecision matters for the objectives of those policies has yet to be fully explored. This paper presents a general equilibrium model of production with renewable exhaustible resources under various subsidies aimed at incentivizing the production of a public benefit. I find that in steady state, the least precise subsidies lead to lower levels of public goods production relative to alternative policies. In addition, depending on the shape of the externality production function and the choice of policy instrument, public goods production may be higher than under the first-best. The model will then be used to simulate nutrient pollution removal using data from the oyster aquaculture industry along the West Coast of the United States.

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