A presumptive pigovian tax on gasoline : analysis of an air pollution control program for Mexico City

WIeS I (07& Policy Resarch WORKING PAPERS Public Eoonomics Country Economics Department The World Bank January 1993 WPS 1076 A Presumptive Pigouvian Tax on Gasoline Analysis of an Air Pollution Control Program for Mexico City Gunnar S. Eskeland Taxing a variable input in polluting activities makes sense when abatement is induced indirectly, rather than by a pollution tax. By including a gasoline tax in an otherwise well-composed control program for Mexico City, one saves 11 percent of the welfare costs of the program, because - keeping emissions constant- costly technical abatement measures are replaced by cheaper demand conservation. PolicyResauhWoiingPapsdisenuinatethefindingsof uoozkm progrs and acnoumge thecxchangcofideas amangBank staff and allothers intcrested in devc1opnentissues.1hesepapers, distributedby theResearchAdvisoy Staff.carry thenames of the authors, reflect only theirviev sand shouldbeused and cited accordinglyMefindings. inermations, o any o neo authots'eown heyshould not be atufibuted to the Wodd Bard, its Board of Directos, its m nagemenat, or any of its manbbs countries.  Policy Research| Pubilc Economics WPS 1076 This paper - a product of the Public Economics Division, Country Economics Department - is part of a larger effort in the department to examine altemative instruments to pollution control in developing countries. The study was funded by the Bank's Research Committee under research project "Pollution and the Chi-ice of Economic Policy Instruments in Developing Countries" (RPO 676-48). Copies of this paper are avaiable free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Cailina Jones, room N1O-063, extension 37699 (January 1993, 32 pages). Without continuous monitoring of emissions, a independent of the price elasticity of demand for pollution control agency needs to evaluate the polluting good. But the higher the demand abatement options itself. Apart from making elasticity, the higher are the costs of not activities cleaner, it should also stimulate including a presumptive tax on the polluting reductions in the level of activity in polluting good in the tool kit of the pollution control sectors. agency. Eskeland develops an analytical framework Eskeland estimates the cost savings available to show that a tax on a variable input, such as when an optimal gasoline tax is included in an gasoline, is useful for this purpose. It encourages otherwise well-composed program, appropriately individuals and firms to sacrifice trips when they accounting for the welfare costs of demand would prefer those sacrifices to those of higher consumption. He shows that the targeted spending on abatement. The instrument exploits emission reductions can be obtained at 11 privately held information about which trips can percent lower costs, saving $64 million annually, be saved at a low social cost. when the demand conservation induced by the gasoline tax allows some other, more expensive Other weaknesses of a program based on abatement options to remain unused. indirect instruments - as opposed to one induced by a theoretically conceived pollution He proposes an ad valorem gasoline tax of tax - remain. One of these is that the agency about 25 percent, when no separate value is may have poorer information than individuals associated with the collection of revenue or with and firms about the status of vehicles and the avoidance of noise, congestion, accidents, and effectiveness of individual abatement options. road damage. In Mexico City alone, the tax Such an information gap - which could be would collect $350 million a year. After recent bridged by a true pollution tax - is abstracted price increases, implicit tax rates in Mexico City from the analysis. are higher than suggested by Eske'and's analysis. Higher rates may or may not be Eskeland shows that the tax rate that belongs justified due to the benefits of demand in a cost-effective pollution control program is conservation not accounted for in the analysis. The Policy Research Working Paper Series disseminates the findings of work under way in the Bank. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The fndings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the Policy Research Dissemination Center  A Presumptive Pigouvian Tax on Gasoline Gunnar S. Eskeland' Public Economics Division, World Bank 'Acknowledgements: An earlitr version of the paper was presnted at AEA's ann meeing in Janar 1992. I have bene-fued gready from cooperation with Mexican Governmen Officials, a World Bank tam lead by Cad Heinz Mumme, a wel as local and foreign consultants. Particular thanks to Chris Weaver of Engine, Fuel an Emisions, California, who has generously shared bia expertie and time. lbanks also to Agr Sandmo of the Norwegian School of Econonices and Buaea Adminisation, Paul Poitney of Resources For the Future, Emmanuel rimenez, Shanta Devarajan and Sergio Marulis of the Wodd Bank for valuable comment.  Table of Contents 1. Introduction 2 2. Theoretical Background 4 3. A Simple Model with Demand Management and Abatement 7 Background for choice of model 7 The consumer's maximization problem 8 The planner's maximization problem 11 Cost effective pollution control 15 4. Application to an Air Pollution Control Program 24 5. Concluding Remarks 30 Bibliography 31  2 1 Introdution The topic of this paper is prompted by a prosaic, but practical challenge: how to reduce air pollution from transport in a metropolitan area like Mexico City, while keeping an eye at the welfare costs of doing so. A least cost solution to such a problem could involve behavioral change, such as modified travel patterns, as well as a number of technical modifications, whether in the form of tune-ups or retrofitting of existing capital equipment, or in the form of new configurations of machinery (e.g. catalytic converters), fuels, etc. These details have not been of great interest to economists in the public finance tradition (with some notable exceptions), since a proposed tax levied on individual emissions wofld provide perfect incentives. Firms and households exposed to such a tax would self-select, taking (only) those measures that are most effective from society's point of view, irrespective of whether they could be categorized as technical modifications, changes in input mix or changes in tLa consumption basket. Using such a tax, or tradeable pollution permits, the agency charged with protecting the environment need know nothing but aggregate marginal costs and benefits of abatement, since the detailed actions that can be taken to reduce pollution need be known only by the economy's micro agents2. Indeed, had a social planner possessed data on how much pollution each individual caused through the year, then a year-end tax bill based on related damages would have provided appropriate incentives to pollution reduction from all kinds of activities. Had emission monitoring been feasible, the planner would not need to know what options individuals and firms in different activities have to reduce emissions, nor how those options compare in terms of costs. In particular, he would not have needed to design special programs for each sector. Sectors, firms and individuals would have been affected by his tax scheme simply in accordance with how much they polluted, and would each have responded with socially optimal effort. When continuous monitoring of individual emissions is not feasible, however (and it is not yet for motor vehicles), the planner needs to ask himself which sectors are polluting, what options exist within the sector, 2 general relut are well pracanted in Baumol and Oatea (1988). Special treatment of the information economy of the maket is found in Weitzman (1974). Notice that if the planner asesua individual marginal abatement cosn with enora that are not perfstly correlated acrou polluters, be can aasea aggrgate abatement coata with Ica error than he can asim individual aatement coat.  3 and how he can best stimulate each of them. It is in this context the analysis of a program to control air pollution from motor vehides In Mexico City takes place. Pollution taxes, rare and still fairly unimportant exceptions in the real world, have been criticized on many grounds, and in this article we discuss one of those: For many types of polluting sources, and automobiles among them, technology does not yet allow continuous monitoring of individual emissions. Feasible monitoring - annual testing of individual rates of emissions (say, grams per liter or vehicle kilometer)3 - leaves the environmental agency in a totally different situation, having to use regulation and incentives in a detailed program aimed at mimicking the least cost program that a pollution tax would have induced. In section 2, we briefly review the theoretical literature on the use of imperfect corrective taxes, to provide a basis for our analysis. In section 3, we develop the theoretical background for cost-effectiveness analysis in a very simple, general equilibrium, welfare economic perspective. We use this framework to show that any program employing inducements to make an activity cleaner also should contain taxes on the main (polluting) input or output used in the activity, since containing the level of the activity is justified as long as abatement is costly and some pollution remains4. We show that the tax that should accompany any given level of abatement (say, a three way catalytic converter) in a cost-effective program is easily calculated; it does not depend on the demand elasticity for the polluting good and it does not depend on knowledge about the benefits of emission reductions. Lastly, in section 4, we apply the analysis to a detailed program of measures to contain pollution in Mexico City, and show how inclusion of a gasoline tax in the tool-kit would reduce the costs of attaining the targeted emission reductions. The savings provided by the proposed tax are conservatively assessed, since we have not assumec any premium for transfer of revenue to 3Apart fiom providing a poor proxy for acul i-une enmision rate (see, among othco, lawson at al. 1990), the method does not combine data on cmision rates with data on vehicle udlizAtion (it could). Ihus, uilizaon is not discouraged, unles aba_teme expenditure raise the relevant marginal cost, and, even then, the method does not discourage use optimally and cheaply, as complementary ibnammen could. 4 We uW the term pollung acdWty about a consmption or production activity aociated with emsions. Taxe on goods or inputs used in the acthiity or outputs from the activity can reduce emisions thougb reduced activity leveh. Alo, they can mae tho activity cleaner, per unit, if there is subsiutability and one can tax a paticularly poeudng bpat or pollang good.  4 the public sector (a premium would be appropriate in a context where revenue generation has social costs), nor any value to reducing other effects of gasoline use that are not charged for, such as accidents, congestion and road damage. a Theoretical Background Optimal taxation theory has mainly been concerned with the minimization of the distortonary costs of revenue-raising taxes (See, for instance, Mirrlees, 1976). The broader normative public finance literature has also taken on the task of providing the case for an authoritative government and intervention through public expenditures, taxation and regulation, where the two main classes of objectives are market failure and concerns about income distribution (Atkinson and Stiglitz, 1980, and Starrett, 1988, both provide broad coverage). The result of greatest relevance for this study was provided by Pigou (1920), whose recommendation that pollution problems could best be taken care of by taxes gave rise to the term Pigowvian taxes'. On Pigouvian (or corrective) taxes, theory prescribes that individuals should be confronted with the full marginal social costs of their activities. Moreover, theory states that if they did, and if the definition of social costs included such effects as the problems caused by pollution, then pollution control would be efficient, in the sense that there would be no net benefits to society either to further (or different) prevention of pollution or to more pollution. Sandmo, 1975, combines two motives for taxation, when he analyzes how a revenue- motivated optimal tax structure would be modified when a negative external effect, like pollution, is associated with one of the commodities. He shows that traditional, distortion-minimizing revenue formulas will prevail, but that a Pigouvian element will be contained in the formula for the for the polluting good. As a special case, if the revenue requirement is sufficiently low, taxation of the polluting good may be sufficient, so that revenues can be raised without causing distortions. 5 The position that authoritative interventio, fr intuce dtug Piguvian tutio, is necess fr efficiency when them are exernl eff, was latr challenged by Coae (1960). Coase gued that voluntary negoations btween tho e causig nd hios afied by an exernal efcot could provide for efficieccy. Later liteatu has emphasized that negotion. may be cosly and inefficient, as may an intervening buaucrt (See Fannell, 1987, for a simple exposition nd discussion).  5 Other theoretical contributions concerned with Pigouvian, or corrective taxes, have generally abstracted from the need to generate revenues through distortionary taxes. This could be interpreted as effectively assuming that it is not costly to fund the public sector, or simply that the two topics can be analyzed separately'. Many have been concerned with the distortionary effects of Pigouvian taxes, however, i; analyzing such taxes when they are not ideal from the perspective of correcting for external effects. The most nctable among these are Sandmo, 1976, Balcer, 1980, and Wijkander, 1985, all asking whether taxes and subsidies levied on complements and substitutes can be helpful when taxation of the polluting good is either not feasible or not perfect, in terms of emission generation. They find that such supportive instruments can be helpful when, respectively: i) the polluting good is used both in a polluting and in a non-polluting activity; ii) some users of the polluting good cause more harm per unit consumed than others, and; iii) taxing the polluting good directly is not feasible. These results can all be read as special explorations of a point made by Greenwald and Stiglitz (1986); that market equilibria in economies with market failures are not constrained Pareto optimal, and that a demand system, with all its own- and cross price elasticities, can provide opporatnities to seek Pareto improvements. In this essay, we examine a situation where resources can be spent on making the consumption of a good less polluting1. The availability of options in pollution abatement implies that taxation of the polluting good would not provide ideal incentives, since it would encourage only the subset of abatement options that reduce the use of the polluting good. Indeed, mandated abatement, rather than demand management, has been at the heart of pollution control programs worldwide. We make the simple point that an efficient program exploits opportunities to reduce activity levels in polluting activities as v%il as opportunities to make each activity cleaner. If emission monitoring were feasible, optimal exploitation of both avenues would have been implemented by one single instrument: an emission tax. Sandmo, 1975, could be read as providing s sppoat for such a spaaion, although the polution control agency would need to cooidinate with th revenue geneatig agency. 7 We shall use the term polluing rather tan the more geneal (but chumsier) exsrnaUuycausLng. Our model is equally valid for a problem with positive eernal effet.  6 In the theoretical literature, the distinction between optimal scale of polluting activities and optimal abatement has been treated only tangentially: The point has been made that pollution taxes are superior to abatement subsidies since the latter may lead to "too much" of the polluting activity (See, for instance, Baumol and taes, 1988)'. In our model, we apply two instruments, an abatement requirement and a tzx on a variable input (the one most strongly associated with pollution generation) in the polluting activity. We show that, unless the polluting good is taxed, the polluting activity is "too large", even when polluters pay for abatemene. The use of more than one instrument to deal with only one negative external effect is commanded by a monitoring problem. When monitoring of individual contributions to pollution is costly, one will want to use indirect instruments to affect the different choices that can affect pollution (See Eskeland and Jimenez, 1992). There are many weaknesses of a program of mandated abatement requirements, as compared to one implemented by a true pollution tax. Ihe improvement proposed here, through the taxation of a major input or output in the polluting activity, merely removes one of these weaknesses - that abatement requirements do not effectively discourage demand for polluting goods. Our gasoline tax proposal is an indirect instrument which reveals privately held information about which trips can be sacrificed at a low social cost, and encourages firms and individuals to sacrifice those'". As an example of weaknesses that remain (as compared to a program induced by a true pollution tax) in the proposed air pollution control program, we have preserved the assumption that the agency has all the knowledge that exists about the stats of vehicles and the efficiency of various abatement options. Consequently, the proposed program is poorer than a theoretically conceivable program - in which the pollution tax would have revealed 8While subsidizing abatement would give too high activity leves in polluig activi, making pollutes pay for baemoet does not imply optimal discouragement; makig polluters pay fior damages wouMd. Te pol pays principle, as advooted by OBCD, regrefilly, usally applies to payment for abatement, but not for daumge. (see OBCD 1975, and Opwchoor and Vor, 1989). 9 Some insight into the role tht can be played by chaqges in the level of activity in poutg otAor is provided by lorgeaon and Wicoxen (1990) nd HaziLl and Kopp (1990). They explore changes in ectoral activity lvels ue ae ult of abatean coda, bowever, rather tha as a rult of polution taxes, input txc or output taxes. 0 Ws use the sacwtjce of uips figutively for options that reduce pollution through reduced demad for the pollding good. An importat category of such options are more efficint ca; the ocial cos will often condst of itmsch as hiOr capital cos (for inosane through acceleated replacement) or loss in terms of m other quit diensios (size power).  7 and exploited all relevant privately held information". How much poorer the program is depends on how important these remaining information gaps are, assuming that the agency exploits rationally the information that it holds. A simple model with demand manageLmnt and abatement Background for choice of model What should a model look like, to facilitate the comparison of emission control options within a sector, to the possibility of shrinking the overall level of activity in the s- 'tor? The aim in our analysis has been to apply a modelling framework which is simple enough to communicate central ideas, but rich enough to compare the most relevant implications of options that are so different that ey cannot be anayzed withow a modelli'g framework. Traditional pollution control programs have emphasized the technical options that can make production and consumption activities less polluting. The model we propose emphasizes that manipulation of demand for polluting goods could represent an interesting alternative or complement to abatement (the latter reduce pollution per unit of polluting good consumed). In the model, abatement expenditures are dealt with only in a very superficial way, since we only need to know the incremental costs per unit of emission reductions provided. We thus need a model which not only allows for behavioral responses to policies that can influence demand, but which also provides a measure of the social costs of such demand manipulation. The models proposed in the welfare economic literature are tailored for those purposes, and, ideally, one would want to apply a model with many consumers or groups of consumers. This would allow for analysis of the distribution of costs and benefits across economic agents, apart from efficiency aspects. Our focus is on efficiency implications, using a model with a representative consumer. Such a framework has two principal shortcomings. First, it cannot be helpful in analyzing the effects on income distribution. This abstraction can be justified only by assuming that the effects 11 In revealing and exploiting which trips can be sacrificed at the lowet ocil code, the gaoline tax is uperior to the prest regulation tht each car is banned fom driving a specific weekday. Ihe higher social cos of uving trips though the rogulton is pty reflected by the fact that howseholds buy driWhgpecnnk, implicidy, by regiseing additional vehicles.  8 of the air pollution contrcl strategy on income distribution is not of major interest, for instance because the planner has available other instruments that can cheaply transfer income between groups"2. Second, in practice, consumers differ along other dimensions, for irstance by owning unevenly polluting vehicles. Our model can best be interpreted as one in which a representative consumer owns a composite of the vehicle fleet in Mexico City"3. We shall employ a model with separability along two lines in the direct utility function, as do Batcer and Wijkander, and a representative consumer model, as do Sandmo and Wijkander. Finally, we assume that public revende generation is not in itself costly. This assumption is reasonable only if the public sector revenue requirement does not exhaust the potential of instruments available for costless revenue generation and transfers to the public sector. The consumer's maximization Droblem: Let individual j's emissions e! of pollutants depend on her consumption of the polluting good, xJ, and the abatement she applies, a!. Let her utility ui depend on quantities consumed, y', xJ, of non-polluting goods and polluting goods, respectively, as well as the total amount of emissions from all n individuals14: (1) u-WuI(JOE, e (x 'a^) I.1 12 We shl here ue the concepts welfare coAt and socia coa to dewcribe net coas, btolled over indiduals, firma and the public sctor, thbu valuig coas equally acroa agent. We defin the concept of cots ahaply in the wecon cost efccwne . 13 An emiasion coefficiont, represeig gSams of we4ihted emissions per liter of gasoline conuimed, is centmal in our anlysi of a gaoline tax Tus, the emsion coefficient wed in this anysi shall be intfereted as the marginl emission coeffcient for a fleet of herenouw vehicles, when the golim price is adjustd ik, tly. 14 We shal assume that the utility fwion aisie the taditonal regrty asuwtions: it is quasiconave, contnuou aund twice diflhnniable. Further, we ame that x, y and a ae constained to noa-neative values. We shal assume that the individually optimal solion doe not involve ither of the come y - 0 or x 0. We sha Auther, in this analyal section, assme tht itl expenditur on ab_tment ae very productive (abatemnt is produced at consant retun to cAie, but its effect on emisions is declnn), so tha the corner a 0 does not occur in the planrs optimm unles in combination with t= 0. Ihe later asUndon is tlaxed i the applied section, where discrto maures are invecpted in the surroundings of the alytically dermined optimum.  9 Individual j takes consumer prices as given and maximizes u' subject to an individual budget constraint which we shall assume is binding, and a constraint for abatement. The individual budget constraint is: (2) 9 + (P. + t)x +pEa F1i +htSE'. where the price of the non-polluting good is normalized to one, p's with subscripts are producer prices, and a tax, t., is levied on the poUuting good. P is j's lump sum income, and the last term on the right hand side is j's share of the tax revenues, all of which are returned to consumers as transfers. Also, a constraint defines a minimum of abatement, 'a bar", which would be zero in the absence of regulation: (3) a, 2 Maximization of (1) subject to (2) and (3) results in the following first order conditions for individual optimum: (4) u'<D _ P' . 0,  10 (5) <, + ,e- PkP + t - -) = 0, (6) u!Oe - pip* - A} = 0, where 0 is the shadow price of j's budget constraint, ?V is the shadow price of j's abatement requirement, and subscripts to the function symbols denote partial derivatives. Now, let us make the assumption that the individual does not take into account the effect of her pollution on herself, and also that she does not take into account the share of her own tax payments that will be returned to her; both are either theoretically correct descriptions or minor approximations if n, the number of individuals which pollute each other and share public revenues (here assumed to be the same), is large'5. Then, from the perspective of individual optimization, the second and the last left hand terms in equation (5) are zero, and the same holds for the first term in equation (6). Further, from (6), we can see that the consumer will adjust abatement to the lowest possible level, so that (6) can be reduced to: (7) a} = a Since there are superscripts for only one individual in the first order conditions, superscripts can be eliminated. Further, since the utility function is determined only to a is Smndnmo, 1975: 'When maximizing utility...-theindividual consumer, being very mall compared to the market, will ie the cfrect of a rmcll chn in his own consumption on the total quantity of good m consumed (good m is the polluting good in Sandmo's model, Eakelund's remmk).  11 monotone transformation, we can eliminate the shadow price of j's budget constraint from (5) and (4) without losing information, to characterize individual optimization by (7) and: (8) _ = pX + tz We shall let the functions x(a,t) and y(a,t.) represent the (Marshallian) demand functions consistent with the first order conditions (7) and (8). Further, since producer prices are fixed, equilibrium quantity changes will equal the partial derivatives of Marshallian demand functions. The Planner's Maximization Problem Now, let us turn to the planner's problem. Let us assume there are constant returns tG scale so that producer prices are given, and that the planner's objective is to maximize the sum of utility levels for the n consumers: (9) w '=AE e Working with a representative consumer in the following, we shall suppress individual superscripts, and describe the planner as maximizing the following welfare function, using mandated abatement, a, and a tax on the polluting good, t., as instruments:'6 16 Wi,th harllian demand fuCtion mabutibted into the utilit unction, t objective finction in an indire utility nction.  12 (10) Max = u(y(a,t),x(a,)Q,nv(x(a,t),a)) subject to a resource constraint which is the sum of the individuals' budget constraints: (11) y(at) + p,X(a,) + p,a = I. We can see that the difference between the individual's objective function, (1), and the planner's (10) is that the individual does not take into account her effect on emissions, since only a negligible amount affects herself, while the planner takes into account the effect of emissions on all individuals. A similar difference is present in their respective resource constraints (2) and (11); while the individual looks at tax payments as costs, the planner takes into account that they are all redistributed. Thus to the planner, taxes paid are not lost, and bear costs only to the extent that they distort resource use. Since we assume transfers are made without costs, only the former of these differences in the two optimization problems represent a challenge to policy in our model. Maximizing (10) subject to (1 1). we have the following first order conditions for the socially optimal allocation: (12) ya(uy y) + x,(u.X nuex - yp) + nue. - yp, = 0 (13) ytX(v ~- y) + x,(u, + ra.e - yp) = 0  13 We can differentiate society's resource constraint (11) with respect to a and t. to obtain expressions for the equilibrium changes in demand: (14) ya 5 = Pa - Pa, (15) Yt, PAt,. Substituting (14) and (15) into (12) and (13), the first order conditions for social optimum are: (16) x,ux + nu,e, - ptu) + nu,e, - p,uy = 0, (17) xtue + nuec - pA,) = 0. Assuming that x. and x, are not zero'7, we can solve for the marginal rates of substitution, to find that the optimal allocation is characterized by: 17If consumption of polluting goods is completely inendtive to the intumes t and a (meaning that the consum absorbs all codJ of the tax and the atement requ_ tem via adjudmna in consuztion of non-pollutig goods only), then c/es - nu, characteize the optimal prmgram, wheme t, is not upecified, shm it has no allocatviw effect.  14 (18) I' + _Ve - Pa (19) U es As (18) and (19) shows, the sum across individuals of the marginal rates of substitution be equal to the marginal rates of transformation, consistent with Samuelson's (1954) result. Samuelson's definition of a public good, that it be non-exclusive in consumption, suits well for the quality of ambient air. Rearranging, and using that marginal rates of substitution in consumption will equal consumer prices (8), we can get some additional intuition about the optimal abatement and tax rate: (20) Rid e t n t, * = - -= - ' X MY ps ux +nuoe (20) states that the tax levied on the polluting good should drive a wedge between the marginal rates of substitution equal to the part of the associated impact on welfare that the consumer does not take into account herself. Eliminating nu., we can see that optimality reqdires:  IS (21) t,, P. _ ._ _ _. (21) states that the optimal tax rate on the polluting good, per unit of emissions from the polluting good, is equal to the direct marginal cost of abatement per unit of achieved emission reductions. (21) will prove a useful comparison when we, in the following, characterize a cost effective program. Before proceeding, let us notice that the optimal program, as characterized by (18) and (19), could be implemented by one instrument, an emission tax, if it were available. This is easily checked by replacing the instruments in (10) with a tax levied on emissions, and modifying the individual budget constraint, (2), accordingly. Cost effective pollution control The optima progran, above, is characterized by abatement and demand management being pursued to the point where marginal benefits equal marginal costs. If benefit estimates are unavailable, or in dispute, helpfil results can be provided by asking how a given, targeted emission reduction can be achieved at lowest possible costs'. Such analysis is called cost effectiveness analysis. In the following, we will show how the concept of cost effectiveness fits into traditional framework of welfare economic analysis. As we saw in the preceding, when producer prices are fixed, supply is infinitely elastic, and equilibrium marginal changes in quantities will equal the partial derivatives of the Marshallian demand functions. Starting from an arbitrary point a, t1, with feasible quantities y, x and a, welfare is at the outset the following: is Enidmas wil often be foumn unavailble or of lmited applcabilit fot quazi"icain of physical awto nch u the e offct on ambieat ur quality of eion reductions, and the efiects on heat of improved ambicat r, s" wll as for valuation of nch outcome. For a rcn, bricf, gnal dscuion, aem Crpper and Oates, 1992. Briefly on what is applicable for Mexico: Mruls, 1991.  16 022) w - HaA~)A where we have let unhat', an uncertain estimate of how many individuals are affected by an individual's emissions, represent the uncertnty in the estimate of the benefits of emission control. Rather than maximzing (22) subject to a constraint on emissions (which, in the end, we will do), let us ask the following question: Starting from an arbitrary point, t0,a, what is the rate at which welfare changes if we change the tax rate slighty? Differentiating (22) with respect to t,, we have: (23) A = yj, + (us + R,c), &x Using the partial derivative of the resource constraint, (15), and the first order condition for individual optimum, (8), we have: (24) W (tF, 4+ xue)xu Emissions will also change when we change the tax rate; from (1), we have:  17 (25) ac Dividing (24) by (25), the margLJd wefare tmpact of changing the tax rate, per unit of associated emission reductions is: (26) &x s e*+Ru While this is a (net) marginal cost expression, we can notice that if we were allowed to adjust only this instrument for the purpose of emission control, then setting (26) equal to zero would be optimal (consistent with (20)). Following the same procedure as for the tax rate, we have the marginal impact on welfare when the abatement requirement is changed slightly from an arbitrary level, per unit of associated emission reductions: (27) w,a. - _______ aa aa e. x, + e, Composing a cost effective program requires the comparison of marginal costs of emission reductions across instruments. However, in comparing the cost expressions for the two instruments (26) and (27), no information would be lost if we were to use a cost measure which 19 We. wii wave the tanm m ind wfwc comu o a mesm that docc not include the expected banfimt, *n hat u0, to conibfm with covenion that mamin codt equal maegini benefits in optimm (me below).  18 does not include an assumed effect of emissions on welfare. Starting from an arbitrary point, eliminating "n hat u." would simply subtract the same amount from the cost expression for each instrument. We can therefore define a measure of marginal welfare cost which only includes the sacrificed consumption of market goods. Subtracting "n hat u," from (26), the marginal cost at which tax rate adjustments provide emission reductions, in terms of sacrificed consumption of market goods, is: (28) 8ae AsK Similarly,the marginal cost at which abatement requirements provide emission reductions, in terms of sacrificed consumption of market goods, is: (29) ~ ae (tx - ). -I- = _t__- p_lu_ aa aa cx c Using the measure "dwhat" for marginal costs, we can notice that optimal policies are characterized by marginal costs equal to "n hat u.". This cost concept thus has the advantage of conforming to the convention that optimality be characterized by marginal costs being equal to marginal benefit. The main advantage of using this cost concepts however, is that the analysis of alternative emission reduction strategies can be isolated from the analysis of the benefits of emission reductions.  19 What, then, can we learn from these expressions? First, notice the simplicity of (28): marginal costs depend only on the tax rate on the polluting good (remember that we assume that other goods are priced at marginal costs) and on the marginal impact on emissions of consuming the polluting good (say, grams of pollutants emitted per liter of gasoline conisumed)'. Second, let us notice what is not in (28): the marginal cost of using tax rate changes to reduce emissions does not depend on the elasticity of demand for polluting goods. The reason is, as we have seen, that the demand responsiveness, x,, affects welfare through product markets multiplicatively, in the same way as it affects emissions. Consequently, it does not affect the ratio between the two. This result does not say that the amount of emission benefits offered by a given tax change is independent of the demand elasticity. What it says is that the marginal welfare costs, per unit of obtained emission reductions, is independent of the demand elasticity. As an example, if the elasticity were small, then the emission reductions would be small, but so would be the costs from sacrificed consumption, since changes in consumption would be small21. This result is illustrated in Figure 1, which is drawn for a given level of abatement, and, consequently, a given e,. The welfare cost of a tax change "dt" is the trapezoid abcd, approximated by the rectangle t-dx. Emission benefits, "de",will equal exdx, and "dx"cancels out in the ratio between the two, which is the expression for marginal costs. 20 For pactical purpos, the asmmption that the esponiveness of omssio to a gaoline price chang will be propostional to the resonsivene of gasoline consumption (i.e. C = e/x) is a ir, thougb prbably conservativ ausumption (Knpnick, IM, provides some analysis). Witb the caveat that the consumption pattern does not hange (average trip length should stay condant, for iance, since cold-stat are very polluting), proportionality between fuel consWuption and emisdons is asumed in the main emisson projctdon models, such as EPA's 'Mobile 4 and AP-42. 21 The rul should be of no supdrise. Tbe frst baid theorem of welfar economics says that efficiency is ensued when agents faee the muginal socil cos and benfits of their actions, iespective of elasticities.  20 Figure 1 Marginal Cost of Increase in Tax, dt Dollars P+t+dt-- d P+t~~~~~~~~ p - __ _ supply a b Demand Gasoline _- I I I liters dx x Emissions, i ! tons de  21 From this, it is clear that the part of the gasoline demand curve which lies above the marginal cost of supply for gasoline is a supply curve for emission reductions, reading from right to left (we have used emissions per liter of gasoline, e1, to produce an alternative unit of measurement along the x-axis). The expression for marginal welfare costs of abatement requirements, (29), is considerably more complicated. In particular, the responsiveness of demand to stricter abatement requirements, x,, remain a determinant both of the welfare costs (in the numerator) and of the emission reductions (in the denominator). Somewhat paradoxically, the cost effectiveness of technical abatement (changing emission coefficients) depends on the demand responsiveness, whereas the cost effectiveness of changes in the tax rate, the demand management instrument, does notl' Also, we can notice that marginal welfare costs of additional abatement are equal to marginal benefits if policies are optimal. Too see this, use (20) and (21) to substitute for t and p. in (29). A cost effective program requires the two instruments to be utilized so that their marginal costs are equalized. Setting (28) and (29) equal to each other, we find that cost effective programs are characterized by: (30) tx = Pa ex _a (30) is also the solution to the maximization of welfare (22) subject to an emission constraint, and each of the expressions in (30) would equal the shadow price of the constraint (by 22 Seveml authors have addressed the issue that abatement requirements affect emisions through demand responsiveness, most notably that the higher costs of new cars decelerate replacement of older, dirtier cas (Crandall et al., 1986, Berkovec, 1985). Equation (18) does not comprise such effects on fleet demographics (which will, to some extent, wash out in the long run), but emphsizes that demand responsivenes will influence costs, via utility lost due to sacrificed consumption, and emisdons, via the same adjustmnts in consumption.  22 going this indirect way, we have also derived the marginal cost for each instrument when they are not exploited cost-effectively). Thus, the set of cost effective programs can be characterized without estimates of demand responsiveness. Further, notice that tWle attractiveness of a tax on the polluting good does not depend on the availability of benefit estimates; the mere application of mandated abatement reveals that welfare costs can be saved, keeping emissions constant, if taxation of polluting goods is not applied accordingly'. Notice that the left hand side expression is the marginal cost measure for the tax on polluting goods, while the right hand expression is the simple, or direct marginal cost for abatement expenditures. Thus, we have shown that this simplistic measure of cost effectiveness, often applied in practical studies, is valid, but only if the polluting good is taxed accordinglyl Notice also that (30), which is a complete characterization of the continuu-m of cost effective programs, is equal to (21), which, together with (19), characterize the optimal program. Thus, obvious to some, the optimal program is a special case amongst cost effective programs. In figure 2, we have illustrated how one can think about a cost effective program. The horizontal axis is the amount of emission reductions targeted. From left to right, we have drawn a marginal cost curve for emission reductions via abatement expenditures (which we now know should include demand responsiveness, although in a cost effective program, as a special case, demand responsiveness cancels out). From right to left, we have drawn the part of the gasoline demand curve which lies above the marginal cost of supply, where the scale must be such that liters match tons emitted on the scale from right to left. A cost effective program is found where the two curves intersect. For any other combination of abatement and tax rate which satisfies the target, the difference between the two marginal cost curves can be saved by substituting, at the margin, the cheaper for the less expensive instrument. 2 Direct emission tas (or tradeable emission permits) op,tinmaly combine discouragement of the poliutiug activity and incentives to making it cleanr. Mandated abatement, on the other hand, needs to be accompanied by inatments discouaging activity levels to minimize welfar costs of emiuion reductions.  Figure 2 Abatement and Demand Reduction Marginal Costa Marginal Costs t a a tX exxa+ ea \Cof X 9 Costs Avoidable In cost effective W exr e-, Ca , )program / ~~Gasoline tax, t < Gasoline supply cost Gasoline demand curve Extent of Abatement Demand Reduction Targeted Total Emission Reductions  24 There is another way of exploiting the results of this section, however. (30) states that if you know the marginal costs per unit of emissions reduced via technical controls, then you also know the gasoline tax rate with which it should be combined, for the program to be cost effective. We shall apply this perspective in the following application of our results to data on pollution control options in Mexico City. 4 AjApplication to an air pollution control program In an analysis of emission control options for motor vehicles in Mexico City, technical control options were ranked according to incremental costs per unit of weighted emission reductions provided (Table 1)2. The list is thus sorted in the sequence it would be implemented if willingness to pay were gradually increased. However, demand reb,ponsiveness is not incorporated in the figures; they simply show the direct incremental costs of abatement divided by the increment in emission reductions, c./e., and consequently do not provide the information we would want for marginal costs of abatement, as shown by formula (29). As (30) shows, however, demand responsiveness cancels out in the expression for marginal costs of abatement if a program is cost-effective. Thus, the figures are valid estimates of marginal costs if the abatement initiatives are accompanied by a gasoline tax that is optimal, conditional on the extent of abatement. Sec World Bank, 1992: Trnport Air Quality Mamgemsnt for Mexico City Metrpolita AM: Sector Study. Weighted gram (or tons) of emissons refer to the foUowing: Air pollution control program will generally (and should) addres seveal species of emitted pollutu simultaneously, and a prioritization is necesuy. In the World Dank analys of the Mexico City protgrm, the following weights werm applied, attempting to reflect the desirbility to achieve ambice standards as well U the contnibution by each cmitted gram to ambient concentrations: Lad: 8S/g,Nox: 4.71g,PMIO: 2.3tg,Duft: O.91g,Sox: 1.41g,CO: 0.04/g(Sec Weaver, 1991).  25 Table 1: Mexico City: Abatement measues and matching gasoline tax rates Coat: Thousand Cumulative Cumulative Matching Dollars per Em jaion Costa Abatement Gasoline weighted ton Reduction Only (Mn USD) Tax Mn wid ton Cents/liter Gas Truck LPG Retrofit -379 90 0 -4.4 Minibus CNG Retrofit -248 148 0 -2.8 Gas Truck CNG Retrofit -225 231 0 -2.4 Gasoline Vapor Recovery -80 275 0 -0.8 Re-engine Buses 140 299 3 1.4 inmibus 1992 Standards 181 391 20 1.7 I&M High-Use Vehicles 209 545 52 1.8 Gasoline Truck 1993 Standards 264 632 75 2.1 Taxis Tier I Standards 322 641 78 2.5 Re-engine R-100 Buses 482 651 83 3.7 Taxi Replacement, 1993 standards 510 714 115 3.7 Centr. Enp. & Maintenance, passenger cars 651 771 152 4.4 Passenger cars to 1993 standards. 669 883 227 4.0 Diesel Especial 699 893 234 4.2 Lower Regular R. Vapor Pressure to 7.5 836 904 243 4.9 Provide Regular Unleaded 923 954 289 5.1 Decentralized Inp. & Maint., Passenger cars 1034 1018 356 5.3 Replace Gasoline Trucks 1114 1096 442 5.0 5% MTBE in Regular Unleaded Gas *ine 1201 1116 467 5.3 Lower RVP in Premium Unleaded. to 7.5 1313 1128 482 5.6 Road Paving (1000 kn) 1335 1136 498 5.7 Passenger Car 1991 standards 1367 1180 508 5.4 Reduce Sulphur to .1% in Diesel 1371 1187 569 5.3 Passenger cars rier 1 standards 1629 1201 578 6.2 US specifications for Diesel 2097 1207 601 7.9 11 % MTBE in Regular Unleaded Gasoline 2447 1219 613 9.0 5% MTBE in Premium Unleaded Gasoline 13487 1222 643 49.0 11% MTBE in Premium Unleaded Gasoline 14728 1226 686 53.2  26 Such a matching gasoline tax is shown in column 4 in Table 1. As an example, if the measure called "1993 standards for Passenger cars" were the costliest applied in a program, we would know that 669 dollars per weighted ton of emissions was the cost of abatement to be matched by the gasoline tax. Using the fact that with that and all the cheaper measures in effect, emissions per liter for the fleet as a whole would average 60 weighted grams, we can calculate that the gasoline tax should be 4 cents per liter, using (30YS. These tax rates represent optimal discouragement of gasoline use, given the burden placed on gasoline users to make their use cleaner. Any combination of technical controls with a lower gasoline tax than suggested implies that consumers could be made better off, keeping total emissions unchanged, by spending less on abatement, in return for lower gasoline consumption. The observant reader will notice that the tax rate per liter of gasoline in Table 1 increases less than proportionally with the costs of applied technical measures. The explanation for this is that the technical measures reduce emissions per liter, so emissions per liter, e,: (the base for a presumptive Pigouvian gasoline tax), are declining as we climb the control cost curves. Therefore, the gasoline tax also becomes an increasingly expensive instrument in pollution control; each liter carries less emissions as successive control measures are undertaken, so the sacrifice of a liter in consumption offers less in terms of emission reductions the cleaner is the average vehicle. To provide an estimate of the additional emission reductions resulting from the gasoline tax, however, we need to apply an estimate of the elasticity of gasoline demand. Berndt and Botero (1985) estimated demand equations based on pooled regional (1973-78) as well as national times series data (1968-79) for gasoline sales in Mexico. Concluding, based on a number of models, they advise an "average" short run price elasticity of -.2, and a long run elasticity of -.7. 25 669 dolur per ton-( t. do1Iar por litr/6O gmm pr liter ) * 10 - > t.-S 0.04. 20 Seveira approdmdonrA a employed in d i calculation: Pat, techl mmr an al aaumed to reduce the averag emiiuon coefficiean by the mout they reduce oveal emissons. Seody, tho demnd changes induced by the gsolin tax ar aumed not to affiet the coda or boefits of the echnical measr.  27 In our calculations, since we are estimating the effects on the 1995 emission inventory, we have employed a price elasticity of -.4, assumed to hold in the medium termZe. Using a demand elasticity estimate of -.4, we can calculate the additional emission reductions that will be provided by the gasoline tax at every level of the technical control cost curve. Since the gasoline tax will induce demand to contract, more emission reductions will be provided at every cost level, and the result is a more moderately sloped control cost curve. The two control cost curves are shown in figure 3, with the area between the curves representing the difference in total costs between a strategy based solely on technical controls and a strategy including demand management with the help of a gasoline tax. 27 Some other empiical cudie indicrte the me rage. Pindyck, 1979, uces pooled data and finda: For OBCD countnie, the price elmaticity exceeds -.4 when the time for adjuatment in four yea or more; for Brazil and Mexico, edimate are -. 12 for th short run and -.SS for the long nn. Stenw et al., IM, report eastimation of varioua models for 21 OECD counties (time ser, and pooled), with an averrge of -.25 for short run elaticitiec and -.8 for long rn eiaticties.  Figure 3 Mexico City: Air Pollution, Transport Control Costs, With and Wlout Gas. Tax 2.6 2.4 - 2.2 - Fuel CWithout Tax 0 Improvements * _ t) 2 Witii Tax .o >asne 2 -~~~~~ ~~Emission standards S 1.8 ! 1.6 - .20.2 - \ , Passection of passenger 1.4 ~~~~~~~~~~~~~cars O)C 1~-.2 ( -Ntraplgas erm 1.4 - 1.2 - ~~~Taxis1 0. o 0.6 040608 Minibuses UE 0.4 Vapor recovery Inspection 0.2 InpcInof passenger cars Inspction of hi h-use vehicles ________ -02 -0.4 F L--~ 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Emission Red.: Million Weighted Tons  29 Under these assumptions, a gasoline tax of 6.2 cents per liter (26%, ad valorem) reduces demand by about 10 percent for a program targeted to reduce weighted emissions by 1.2 million annual tons by 1995. Applying such a tax thus allows for 10% additional emission reductions at a willingness to pay of USD 1629/ton. We can notice that only a couple among all the abatement measures offer emission reductions of that magnitude. Alternatively, if settling for a target of 1.2 million tons, one can avoid employing measures escalating in costs from USD 1335/ton upwards to 1629. The cost savings would be an estimated 64 million dollars annually, or 11 percent of the estimated total control costs. An additional benefit would be that the gasoline tax, in Mexico City alone, would generate an estimated 350 million dollars in revenue. The following can highlight the interdependency between the two sets of instruments. When control costs reach 1629 dollars per ton, average emission coefficients have been reduced by 70 percent, reducing the base for the presumptive emission tax on gasoline to 30 percent of its pre-control level. Thus, at a willingness to pay of 1629 dollars per ton, the optimal gasoline tax rate would have been 20 cents per liter, rather than 6.1, if it were the only available instrument. At this level, gasoline taxes alone would have reduced emissions by 34 percent, generating revenues of almost 800 million dollar?. A higher gasoline tax could be justified by a number of alternative assumptions, but not (as shown in Section 3) by a higher (or lower) demand elasticity. Firstly, since the technical control cost curve is steep for reductions exceeding 1.2 million tons, a further rise in the gasoline tax is one among very few effective instruments if further reductions are needed. Secondly, attaching a separate value to the transfer of funds from the private sector to the public sector, quite rational for a country that has suffered severely under inadequate public finances, would justify a higher tax rate (in the present analysis, no value to this transfer is assumed). Thirdly, reduction in usage also has benefits in terms of reduced congestion, noise and accidents, neither of which are accounted for in this analysis. G iven the assmod time perpctive of 2-4 years, the aumption that all the tehnical moama have reached their fbll effect b probably optimistic, indicating that the bae of the preamptive golim tax (and conaneqdy Its ae), b conseratively aaaead.  30 Concluding .-marks The task set was to study whether imperfect demand management instruments such as gasoline taxes can play a role in a cost effective pollution control program. We started by presenting an analytical framework which allows the comparison of demand management instruments with mandated abatement requirements. On theoretical grounds, the framework provided the following results: i) adding mandated abatement requirements to a program consisting of indirect taxes will improve the program; ii) adding indirect taxes to a program consisting of mandated abatement requirements will improve the program; iii) the set of programs in which abatement and demand management is combined in a cost-effective fashion is characterized without knowledge of the demand elasticity for gasoline; iv) the cost associated with not including gasoline taxes in the tool-kit for the control program is, however, larger the higher the demand elasticity. To investigate the practical significance of these findings, the framework was applied to a recently analyzed program of technical interventions to reduce air pollution from urban transport in Mexico City. It was found that a tax of 6.2 cents per liter would be suitable for a program aimed at reducing emissions from the 1995 vehicle fleet by about 70 per cent. Using a demand elasticity of -.4, the gasoline tax would make the targeted emission reductions attainable at 11 per cent lower social costs, including the welfare costs of demand manipulation. The low level of the tax is partly explained by the fact that the technical interventions will have reduced average emission coefficients by 60 to 70 per cent, so that marginal emissions per liter, the base of a Pigouvian gasoline tax, are also diminished. The recommended tax would have been higher if: i) a value were associated with the transfer of funds to the public sector (the tax will collect 350 million dollars in Mexico City alone); ii) higher emission reductions were targeted, and/or; iii) reduced congestion, accidents and road damage were valued as well. After recent increases in gasoline prices of 50 per cent, implicit tax rates in Mexico are higher than those suggested above. The higher tax rate may well be justified by the reasons mentioned, as well as by the fact that average emission coefficients are still much higher than those assumed above for 1995. For a city with a persistent problem of air pollution, it is possible that the tax decrease over time, if reductions in emissions coefficients are sufficient to so warrant, or that it increase over time, if the increase in demand is such that increasingly expensive measures must be undertaken.  31 Bibliography Atkinson, A., and J.E.Stiglitz. (1980). Lectures on Public Economics. McGraw-Hill, United Kingdom. Balcer, Yves. (1980). "Taxation of Externalities, Direct versus Indirect". Joumnal of Pblic Economics 13, 121-29. Baumol, W. J. aud W. E. Oates. (1988). The theory of environmental Dolicy, Prentice-Hall, Englewood Cliffs, New Jersey, USA. Berndt, E. and G. Botero (1985): "energy demand in the transportation sector in Mexico". Journal of Development Economics 17, 219-38, North-Holland. Berkovec, J. (1985). "New car sales and used car stocks: a model of the automobile market", Rand Journal of Economics. Vol. 16, No. 2. Summer. 195-214. Coase, Ronald. (1960). "The problem of social costs."Journal of Law and Economics 3, 1-44. Crandall, Robert W. et, al.. (1986). Regulating the Automobile. Ihe Brookings lnstitution, Washington, D.C. Cropper, Maureen L. and Wallace E. Oates. (1992). "Environmental Economics: A Survey". Journal of Economic Literature, Vol. XXX, June, pp. 675-740. Eskeland, Gunnar S. and Emmanuel Jimenez. (1992). "Policylnstruments for Pollution Control in Developing Countries". The World Bank Research Observer, vol. 7, no. 2, July, pp.145-69. Eskeland, Gunnar S. (1992 b). "How imperfect are imnperfect incentives: A comparison of individualized versus uniform indirect Pigouvian Taxes". In Process. Farrell, Joseph. (1987). "Information and the Coase Theorem." Journal of Economic Perspectives 1, no.2: 113-29. Greenwald, Bruce C. and Joseph E. Stiglitz. (1986). "Externalities in Ecowmies with Imperfect Information and Incomplete Markets". Ouarterly Journal of Economics 101, 229-64. Hazilla, Michael and Raymond J. Kopp (1990). "Social Costs of Environmental Quality Regulation: A General Equilibrium Analysis".Journal of Political Economy, August, 98 (4), pp.853-73. Jorgenson, Dale W. and Peter J. Wilcoxen (1990). "Environmental regulation and U.S. economic growth". Rand Journal of Economics, Vol, 21, No. 2, Summer 1990. Krupnick, Alan (1992). "Modelling issues in the control of air pollution from transport". Processed (submitted for the World Bank Research Working Paper Series).  32 Lawson, Douglas R., Groblicki, Peter J. and Donald H. Stedmand, Gary A. Stedman, Gary A. Bishop and Paul L. Guenther. (1990). "Emissions from In-use Motor Vehicles in Los Angeles: A Pilot Study of Remote Sensing and the Inspection and Maintenance Program" Jounal of the Air and Waste Management Association, Vol. 40. Margulis, Sergio (1991). "Back of the envelope estimates of environmental damage costs in Mexico". Policy Research Working Paper 824, World Bank. Mirrlees, J. A. (1976). "Optimal tax theory: a synthesis". Journal of Public Economics, 6, 327-58. OECD (Organization for Economic Cooperation and Development). 1975. The Polluter Pay PriniDle. Paris. Opschoor, J. P. and Hans Vos (1989). The Anlication of Economic Instruments for Environmental Protection in OECD member countries. Paris, Organization for Economic Cooperation and Development. Pigou, A.C. (1920). Economics of Welfare. Macmillan, London. Pindyck, R. (1979). The Structure of World Energy Demand" MIT Press, Cambridge, MA, USA. Sandmo, Agnar. (1975). "Optimal Taxation in the Presence of Externalities". Scandinavian Journal of Economics 77, 86-98 (then with the name Swedish Journal of Economics). . (1976). "Direct versus Indirect Pigouvian Taxation". European Economic Review 7. Starrett, David A. (1988). Foundations of public economics. Cambridge Economic Handbooks. Cambridge University Press. Sterner, T., C. Dahl and M. Franzen. (1992). Carbon Tax Policy, Carbon Emissions and the Global Environment". Journal of Transport Economics and Policy, May, 1992, 109-119. Weaver, Christopher S. (1991) "Proposed Pollutant Weights for the Mexico City Air Pollution Control Program." Annex 4 in World Bank (1992). Weitzman, Martin L. (1974) "Prices vs. Quantities", Review of Economic Studies 41, 477-91. Wijkander, Hans. (1985). "Correcting Externalities Through Taxes on Subsidies to Related Goods". Journal of Public Economics 28, 111-25. World Bank. (1992). "Mexico Transport Air Quality Management in the Mexico City Metropolitan Area". Sector Study, March 9, 1992, 10045-ME. World Bank, Publications Unit.  Policy Research Working Paper Series Contact Title Author Date for paper WPS1060 Economies of the Former Soviet Dmitr Steinberg December 1992 E. Zamora Union: An Input-Output Approach 33706 to the 1987 National Accounts WPS1061 Dynamic Response to Foreign Klaus Schmidt-Hebbel December 1992 A. Maranon Transfers and Terms-of-Trade Luis Serven 31450 Shocks in Open Economies WPS1062 Economic Development, Robert E. B. Lucas December 1992 WDR Environmental Regulation, and the David Wheeler 31393 International Migration of Toxic Hemamala Hettige Industrial Pollution, 1960-88 WPS1 063 Mongolia: Privatization and System Cevdet Denizer December 1992 A. Oropesa Transformation in An Isolated Alan Gelb 39075 Economy WPS1064 More Evidence on Income George R. G. Clarke December 1992 R. Martin Distribution and Growth 39065 WPS1065 Strengthening Uganda's Policy Thomas Owen Eisemon January 1993 C. Cristobal Environment for Investing in John Sheehan 33640 University Development George Eyoku Franklin Van Buer Delane Welsch Louisa Masutti Nat Colletta Lee Roberts WPS1066 Pollution Control in a Decentralized Antonio Estache January 1993 A. Estache Economy: Which Level of Kangbin Zheng 81442 Government Should Subsidize What In Brazil WPS1067 Returns to Investment in Education: George Psacharopoulos January 1993 G. Psacharopoulos A Global Update 39243 WPS1068 Enterprise Reform in Eastern Europe Sweder van Wijnbergen January 1993 B. Pacheco 37033 WPS1069 Why Is There Proportionately More Estelle James January 19