A second-best analysis of alternative instruments for the preservation of natural resources

Abstract

The literature on second-best environmental taxation provides us with a broad understanding of the welfare impacts of pollution regulation. However, most of the research undertaken to date has focused on environmental pollution, while other topics in environmental economics, such as the preservation of natural resources, have not warranted much attention in the optimal taxation literature. This paper uses a simple general-equilibrium model to analyze the welfare effects of taxes on final goods, taxes on natural resources, and extraction permits with a second-best approach based on the existence of initial distortionary taxes. This analysis not only takes into account the non-use utility of the mere existence of natural resources, but also captures the consequences of enjoying environmental goods on labor supply decisions, through the use-value attributed to natural resources. The comparison of the welfare impacts of a tax on final consumption and a tax on the use of natural resources is not conclusive. A consumption tax leads to a higher primary welfare effect than a resources tax, while taxing natural goods generates more revenue-recycling income than taxing consumption goods. In addition, as extraction permits do not generate new public revenues to reduce pre-existing distortionary taxes, this intervention entails the highest welfare costs.