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Linear Pigovian taxes and the optimal size of a polluting industry

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  • Ross McKitrick
  • Robert A. Collinge

Abstract

Confusion surrounding the appropriateness of long-run considerations in effluent regulation has arisen in the literature and recently carried over into textbooks. We use a factor input model under oligopsony to show that, when firms can influence the level of marginal damages, a linear pollution tax does not satisfy the long-run entry-exit condition. Previous results to the contrary are shown to depend on restrictive assumptions. Efficient policy design requires a lump-sum refund or any one of various non-linear pricing schemes.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 33 (2000)
Issue (Month): 4 (November)
Pages: 1106-1119

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Handle: RePEc:cje:issued:v:33:y:2000:i:4:p:1106-1119

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