Events at CERGE-EI

Prof. Bård Harstad

University of Oslo, Norway

Authors: David Austen-Smith, Wioletta Dziuda, Bard Harstad, and Antoine Loeper

Abstract: Policy makers may disagree on when intervention is appropriate, but they tend to agree as to what interventions are inefficient. Nevertheless, when regulating international trade, food security, environmental protection, or redistribution, governments oftentimes intervene with inefficient instruments such as distortionary taxes and quotas. To understand this puzzle, we provide a model where the need for intervention varies over time and policy changes require the consent of more than one pivotal party. Intervening via an inefficient instrument makes repeal of the intervention more likely when the need for it decreases, and thus makes the less interventionist party more inclined to intervene in the first place. As a result, the beneficial 'double dividend' associated with emission taxes makes them less likely to be politically acceptable. These effects are more pronounced in polarized and volatile environments.