Pigovian Taxes, Tradable Permits and a Dynamic Process for an Economy with Pollution

This paper's purpose is to discuss the problems posed by water pollution, as well as its resolution in a static and dynamic context. We consider an economy with a public "bad" : pollution. The overproduction of this good is corrected in a static context by using incentive instruments: Pigovian taxes and tradable permits. In a dynamic context, we use effluent standards to bring this economy from a laissez faire equilibrium (where firms are free to pollute) to an efficient state in the sense of Pareto. To achieve this: i) we characterize an efficient state; ii) we use stability analysis to simulate the evolution of this economy to the optimum; iii) finally, we establish the main properties of the dynamic process (feasibility, individual rationality, convergence, stability) .