A second-best analysis of environmental subsidies

This paper examines the complications posed by pre-existing tax distortions in the economy, for the evaluation of a variety of subsidy policies that a ffect the environment. These complications include not only the efficiency cost of financing the subsidy by distortionary taxation, but also the inter action effects between the subsidized market and markets with pre-existing taxes. Studies that ignore both of these effects, or only incorporate the f irst type of effect, can be highly misleading.