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An Algorithm for Optimal Pigouvian Taxes Without Benefits Data

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  • Salvatore Bimonte

Abstract

The Pigouvian prescription to internalize external diseconomies and to achieve the optimum social equilibrium is well known: a unit tax on polluting activities equal to the marginal social damage arising at the after-tax optimal level of activity. If an authority imposes an effluent fee on emissions equal to the marginal social damage, the resulting equilibrium is Pareto-efficient. It has not been possible to translate the Pigouvian dictum into actual because of the problem of quantifying such a tax and its heavy subjective information requirements. This makes the monetary value of the damage difficult to determine. In order to overcome this difficulty, this paper develops a different theoretical approach. The main goal is to provide the environmental authority with an algorithm which allows policy-makers to base decisions on technical data (i.e. firms' production functions) rather than on subjective information (i.e. individuals' utility functions). The paper illustrates advantages offered by this approach, providing some theoretical and practical conditions useful in calculating the optimal tax. Copyright Kluwer Academic Publishers 1999

Suggested Citation

  • Salvatore Bimonte, 1999. "An Algorithm for Optimal Pigouvian Taxes Without Benefits Data," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 13(1), pages 1-11, January.
    • Handle: RePEc:kap:enreec:v:13:y:1999:i:1:p:1-11
    DOI: 10.1023/A:1008369309030
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    References listed on IDEAS

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    1. Stephen Smith, 1992. "Taxation and the environment: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 13(4), pages 21-57, January.
    2. Miller, Jon R & Lad, Frank, 1984. "Flexibility, learning, and irreversibility in environmental decisions: A bayesian approach," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 161-172, June.
    3. Wittman, Donald, 1985. "Pigovian taxes which work in the small-number case," Journal of Environmental Economics and Management, Elsevier, vol. 12(2), pages 144-154, June.
    4. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, January.
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    Cited by:

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    2. Rousseau, Sandra & Telle, Kjetil, 2010. "On the existence of the optimal fine for environmental crime," International Review of Law and Economics, Elsevier, vol. 30(4), pages 329-337, December.

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