14th journées Louis-André Gérard-Varet

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Deisgning Feebates
Sofronis Clerides, Costas Hadjiyiannis

Last modified: 2015-05-11

Abstract


A feebate scheme is a combination of fees and rebates intended to shift the
composition of sales among substitute products. In recent years they have
been applied in automobile markets in order to shift sales from low-economy
to high-economy vehicles. One of their appealing features is that they can
-- in principle -- be made revenue-neutral, and therefore politically
palatable. Recent empirical work has found that revenue-neutral feebates
reduce total welfare and that welfare can increase only with feebates
generating substantial government revenue. Motivated by this finding, we use
a theoretical differentiated product framework to explore the welfare
implications of feebate-like schemes. We confirm that revenue-neutral
feebates decrease welfare when demand is symmetric. We also show that when
demand is sufficiently asymmetric it is possible to design feebate schemes
that increase welfare while maintaining revenue neutrality.


Keywords


feebates; environmental taxation; pollution taxes