Friday, June 5, 2009

Again: tax, do not subsidize

I reported previously that if the goal is to improve the environment, one should tax polluters rather than subsidize non-polluters. The reason is that subsidizing increases the use of resources and necessitates taxing something else to generate the income.

David Kelly provides another argument. While a subsidy may improve the environment in the short run, it hurts it in the long run. This has to do with higher interest rates, which lead to over-accumulation of capital and an increase the opportunity cost of the environment. Subtle, and this shows that partial equilibrium analysis can lead you astray.

1 comment:

Stephen Monrad said...

I get the point. However, it would have to be a pretty big subsidy program to affect interest rates. If government subsidy of green technologies can help them with their initial development, I still think it is probably worth it in the long run.