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A Note on Emissions Taxes and Incomplete Information

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  • Carlos A. Chavez

    ()
    (Departamento de Economia, Universidad de Concepcion, Concepcion, Chile)

  • John K. Stranlund

    ()
    (Department of Resource Economics, University of Massachusetts Amherst)

Abstract

In contrast with what we perceive is the conventional wisdom about setting emissions taxes under uncertainty, we demonstrate that setting a uniform tax equal to expected marginal damage is not generally efficient under incomplete information about firms’ abatement costs and damages from pollution. We show that efficient taxes will deviate from expected marginal damage if there is uncertainty about the slopes of the marginal abatement costs of regulated firms. Moreover, efficient emissions tax rates will vary across firms if a regulator can use observable firm-level characteristics to gain some information about how the firms’ marginal abatement costs vary.

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Bibliographic Info

Paper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2008-5.

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Length: 13 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:dre:wpaper:2008-5

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Web page: http://www.umass.edu/resec/
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Keywords: Emissions Taxes; Incomplete Information; Uncertainty;

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References

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  1. Michael Hoel & Larry Karp, 1999. "Taxes and Quotas for a Stock Pollutant with Multiplicative Uncertainty," Working Papers 1999.15, Fondazione Eni Enrico Mattei.
  2. Sandeep Baliga & Eric Maskin, 2003. "Mechanism Design for the Environment," Levine's Working Paper Archive 506439000000000341, David K. Levine.
  3. Moledina, Amyaz A. & Coggins, Jay S. & Polasky, Stephen & Costello, Christopher, 2003. "Dynamic environmental policy with strategic firms: prices versus quantities," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 356-376, March.
  4. Brita Bye & Karine Nyborg, 2003. "Are Differentiated Carbon Taxes Inefficient? A General Equilibrium Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 95-112.
  5. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 595-601, October.
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  7. John K. Stranlund & Carlos A. Chavez & Mauricio G. Villena, 2007. "The Optimal Pricing of Pollution When Enforcement is Costly," Working Papers 2007-6, University of Massachusetts Amherst, Department of Resource Economics.
  8. Philippe Quirion, 2004. "Prices versus Quantities in a Second-Best Setting," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(3), pages 337-360, November.
  9. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
  10. Hoel, Michael & Karp, Larry, 2001. "Taxes versus Quotas for a Stock Pollutant," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5fx9p7kf, Department of Agricultural & Resource Economics, UC Berkeley.
  11. Malcomson, James M, 1978. "Prices vs. Quantities: A Critical Note on the Use of Approximations," Review of Economic Studies, Wiley Blackwell, vol. 45(1), pages 203-07, February.
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  14. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
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Cited by:
  1. Stephen Holland & Andrew J. Yates, 2014. "Optimal Trading Ratios for Pollution Permit Markets," NBER Working Papers 19780, National Bureau of Economic Research, Inc.
  2. Guglielmo Maria Caporale & Christophe Rault & Robert Sova & Anamaria Sova, 2010. "Determinants of Pollution Abatement and Control Expenditure in Romania: A Multilevel Analysis," CESifo Working Paper Series 3255, CESifo Group Munich.
  3. Guglielmo Caporale & Christophe Rault & Robert Sova & Anamaria Sova, 2010. "Pollution Abatement And Control Expenditure In Romania: A Multilevel Analysis," William Davidson Institute Working Papers Series wp994, William Davidson Institute at the University of Michigan.

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