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Instant Efficient Pollution Abatement under Non-Linear Taxation and Asymmetric Information: The Differential Tax Revisited

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  • Paul Mensink

    (Independent)

Abstract

This paper analyzes incentives for polluting firms to exchange abatement cost information under the non-linear pollution tax scheme (‘differential tax’) introduced by Kim and Chang [J. Regul. Econom. 5, 1993, 193-197]. It shows that polluting firms have - under mild conditions - an incentive to join a coalition whose members mutually truthfully exchange information as well as commit themselves with respect to their abatement decisions. As a result, the differential tax triggers instantly - i.e. no abatement adaptation is needed – efficient abatement levels without the regulator knowing marginal abatement costs. Consequently, this paper shows that differential taxation results in lower social costs than traditional non-linear taxation which triggers efficient emissions only after a period of non-efficient abatement.

Suggested Citation

  • Paul Mensink, 2004. "Instant Efficient Pollution Abatement under Non-Linear Taxation and Asymmetric Information: The Differential Tax Revisited," Working Papers 2004.124, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2004.124
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    References listed on IDEAS

    as
    1. Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, American Law and Economics Association, vol. 4(1), pages 1-17, January.
    2. Kim, Jae-Cheol & Chang, Ki-Bok, 1993. "An Optimal Tax/Subsidy for Output and Pollution Control under Asymmetric Information in Oligopoly Markets," Journal of Regulatory Economics, Springer, vol. 5(2), pages 183-197, June.
    3. Robert Wilson, 2005. "Information, efficiency, and the core of an economy," Studies in Economic Theory, in: Dionysius Glycopantis & Nicholas C. Yannelis (ed.), Differential Information Economies, pages 55-64, Springer.
    4. Bulckaen, Fabrizio, 1997. "Emissions Charge and Asymmetric Information: Consistently a Problem?," Journal of Environmental Economics and Management, Elsevier, vol. 34(1), pages 100-106, September.
    5. Partha Dasgupta & Peter Hammond & Eric Maskin, 1980. "On Imperfect Information and Optimal Pollution Control," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(5), pages 857-860.
    6. Evan Kwerel, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 595-601.
    7. Ross McKitrick, 1999. "A Cournot Mechanism for Pollution Control under Asymmetric Information," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 14(3), pages 353-363, October.
    8. Karp Larry & Livernois John, 1994. "Using Automatic Tax Changes to Control Pollution Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 38-48, July.
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    More about this item

    Keywords

    Externalities; Pollution taxes; Coalition formation; Non-linear taxation; Asymmetric information; Co-operative game theory;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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