ENERGY TAXES AND AGGREGATE ECONOMIC ACTIVITY

This paper shows that the output losses from energy taxes are signifi-cantly larger than usually computed when due account is taken of imperfect competition among energy-using firms. Even with perfect competition among these firms, the loss in GNP is of the same order of magnitude as the revenue raised by these taxes. However, in the pres-ence of imperfect competition the output losses are much higher. There are particularly large transitory losses in the immediate aftermath of energy-price increases when firms act as implicitly colluding oligop-olists. These losses become considerably smaller if energy taxes are phased in. We also show that taxes that affect only householdconsump-tion of energy have much smaller effects. In particular, for the empiri-cally plausible parameter values we consider, such taxes have no effect on employment or output in the non-energy sector. We would like to thank Jim Costain for his untiring research assistance, and the NSF for research support. 160 Rotemberg & Woodfor