Input versus Emission Taxes: Environmental Taxes in a Mass Balance and Transaction Costs Perspective

The standard policy recommendation to limit pollution is to use taxes or tradeable quotas on emissions. A general emphasis on emissions does not, however, take proper account of the characteristics of the material flow through the economy. An analysis of the relationships between transaction costs and features of this flow shows that it may be less costly to tax inputs into the economy. The paper focuses on the advantages of a mass flow perspective in environmental economics, the trade-off between the precision of an environmental regulation and its implementation costs, and develops criteria for choosing between input and emission-related instruments.