Should Benefit-Cost Analyses Take Account of General Equilibrium Effects?

V. Kerry Smith, Jared C. Carbone

Research output: Contribution to journalArticle

6 Scopus citations

Abstract

This paper demonstrates the importance of general equilibrium (GE) feedback effects inside and outside markets for the measurement of the efficiency costs of taxes in a distorted economy. Our specific focus is on the changes in environmental amenities that can result from pollution externalities generated from production activities. Even when amenities are under three percent of virtual income, the error in the GE approximations of the welfare effects of new taxes with pre-existing distortions can increase threefold. The nature of the link between the source of the external effects influencing amenities and the changes in amenity services can alter the conclusions one would make about the merits of an intervention based on benefit-cost analyses.

Original languageEnglish (US)
Pages (from-to)247-272
Number of pages26
JournalResearch in Law and Economics
Volume23
DOIs
StatePublished - 2007
Externally publishedYes

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ASJC Scopus subject areas

  • Law
  • Economics, Econometrics and Finance (miscellaneous)
  • Economics and Econometrics

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