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Once consumers are assigned different distributional weights, it is possible for policy changes with efficiency losses to raise social welfare by ’improving’ the distribution of income. Two approaches can be used to account for distributional effects. The first, which is recommended by Dre_ze and Stern (1990), multiplies the dollar change in utility for each consumer by their distributional weight and sums them. Many analysts are reluctant to allow their subjective assessments about the weights to play such an important role in policy evaluation. Bruce and Harris (1982) and Diewert (1983) avoid this problem by using the compensation principle to convert efficiency gains into Pareto improvements. Whenever governments balance their budgets, they must choose how to transfer revenue across consumers, and by choosing patterns of transfers to make the personal shadow value of government revenue positive for every consumer, there are strict Pareto improvements from aggregate dollar gains in utility.

In public economics applications, the MCF is frequently used to compute the cost to private surplus of raising an additional dollar of government revenue. One of the most common examples is provided by the revision to the Samuelson condition that follows the approach recommended by Pigou (1947). The MCF is rarely used in the applied welfare literature to compute shadow prices. By doing so in this chapter, it is possible to demonstrate the separate, but related roles of the MCF and the shadow value of government revenue. While the MCF is the cost to private surplus of transferring a dollar of revenue to balance the government budget, the shadow value of government revenue is the change in social welfare from endowing another dollar of revenue on the government. Thus, the MCF is the welfare effect of transferring given resources between the private and public sectors of the economy, while the shadow value of government revenue is the welfare effect of expanding the economies’ resources. That is why the shadow value of government revenue, and not the MCF, converts efficiency gains into utility. The relationship between the MCF and the shadow value of government revenue is used to reconcile different measures of the MCF used in the public economics literature.

This chapter examines welfare measures when they are made without cardinal utility functions to understand the properties of the aggregate dollar changes in utility computed in a conventional Harberger (1971) analysis. The Hatta (1977) decomposition is used to show how, for individual consumers, dollars are a reliable proxy for utility, whenever policy changes are incrementally small. This decomposition finds that income effects are a scaling coefficient on the efficiency effects from marginal policy changes that play no role in single consumer economies. A number of different approaches are examined to account for distributional effects when there are heterogenous consumers.

The concept of energy justice can be applied to the specific problem of making climate change mitigation laws and policies that are fair and equitable. This chapter inquires into the design of climate change laws to minimize undue adverse effects on low-income households. It examines the literature about the risk of climate change policies being regressive in their distributional effect. It examines carbon pricing, consumer fuel subsidies, transport, electric vehicle incentives, and energy efficiency in housing. It finds that laws can be improved to achieve justice goals, but it is often difficult. The recycling of carbon price revenues for the benefit of low-income households is important, as is the reduction of distinctions between the policy spheres of climate change and social welfare. It is concluded that climate change laws can be made more just, and more effective, if distribution is a central part of their design.

This chapter analyzes the difficult challenges that arise when considering the environmental justice effects of federal rules and regulations. It complements the discussion in Chapter 4 by examining a different part of the rulemaking process. Specifically, the authors identify five issues as being important in any analysis of distributional implications of a new environmental standard: the geographic scope of the analysis, the identification of potentially affected populations, the selection of a comparison group, how to spatially identify effects on population groups, and how exposure or risk is measured in an analysis. For each issue, the authors consider how it has been addressed in the academic literature, as well as in practice by the EPA as part of five recent proposed or final rulemakings completed under various pollution control statutes. The chapter concludes that, even though there has been a substantial uptick in the number of rules that consider environmental justice issues in their accompanying economic analysis, there remain significant analytical issues to resolve before this becomes a routinized practice.

This chapter explores the distributional effect of a change from the existing pay-as-you-go (PAYGO) U.S. Social Security system to one that combines both PAYGO and investment-based elements. The shift to the personal retirement account (PRA) system is potentially more significant for blacks than it is for whites in combating poverty in old age. Individuals with higher earnings and benefit levels receive more weight in the internal rate-of-return calculations. Furthermore, higher income groups tend to receive benefit increases from a PRA system relative to the Social Security system that are larger than those of lower income groups. All demographic and income groups can benefit from an investment-based system with a lower saving rate than the projected long-run PAYGO tax, and that the potential reductions in poverty are the largest for those most at risk of poverty.

We include the cost of pollution in the production function because it contributes in the short term to the supply potential of the economy, although simultaneously weakening its long-term growth path. In the short term, pricing pollution changes the preexisting combination of production factors by attributing to the use of natural capital part of the supply previously attributed to labor and capital. By pricing pollution, green capital thus affects the short-term equilibrium and becomes a factor of production in which it is necessary to invest for long-term expansion.

This chapter explores the evolving politics of asbestos injury compensation in the United States, which has revolved around tort litigation, a classic example of adversarial legalism. Asbestos policy, however, has taken shape through a complex process which produced a layered mix of adversarial and bureaucratic legalism that today co-exist side-by-side. Overall, the adversarial legal elements of asbestos have a political trajectory that inverts the trajectory of SSDI (Social Security Disability Allowance). Where SSDI had intense conflict over the program’s creation that tapered off, conflict over asbestos litigation started quietly but increased over time. (Meanwhile, the politics of workers’ compensation programs, a more bureaucratic alternative to asbestos injury compensation than tort litigation, seemed to parallel the politics of SSDI). Taken together, these cases underscore how the distinct patterns of distributional effects and blame assignment characteristic of adversarial and bureaucratic legalism shape politics over time.

Home ownership is subsidized by the Dutch tax system compared with other assets. Due to falling interest rates in recent decades, older home owners, who have (largely) repaid their mortgage loan, have benefited relatively more from the favourable tax treatment of owner-occupied housing compared with younger home owners, because for the latter the mortgage interest deductibility is relatively more important than the taxation of home equity (via the taxation of imputed rent). The subsidy on owner-occupied housing results in welfare losses because it stimulates excessive housing consumption, distorts financing decisions, and puts pressure on the housing market and spatial planning. In addition, the subsidy—in combination with mandatory pension savings—leads to excessive saving by many households and unnecessary restrictions on consumption in earlier phases of the lifecycle. For these reasons, the subsidy on owner-occupied housing should be eliminated under a uniform tax treatment of all capital income, where the tax treatment of owner-occupied housing is neutral relative to other assets.