Policy analysis in the presence of distorting taxes

This article first describes the new literature in environmental economics on the so-called "double-dividend" and then explores its implications for a broad range of economic issues. This literature reveals that in a second-b est, general-equilibrium setting environmental measures raise costs and pri ces and thereby reduce the real wage. This rise in the cost of living reduc es slightly the quantity of labor supplied in an already highly distorted l abor market, giving rise to losses in social welfare that can be large rela tive to the basic gains from a cleaner environment. These losses can be off set to some extent by using revenues (if any) from the environmental progra ms to reduce existing taxes on labor This same line of analysis applies to many programs and institutions in the economy that mise the cost of living: tariffs and quotas on imports, agricultural price-support programs, monopo ly pricing, programs of occupational licensure that limit entry, and many o thers. Thus, traditional, partial-equilibrium benefit-cost analysis appears , in many instances, to have unwittingly omitted from the calculations a po tentially quite significant class of social costs. (C) 2000 by the Associat ion for Public Policy and Management.