This paper examines the use of inflexible Pigovian taxes/subsidies to correct a stock externality. An optimal control framework is first used to characterize the first-best path for a Pigovian correction that varies continuously. This first-best path is then contrasted with inflexible second-best paths in which the level of the correction can be set only once or twice. The optimal timing of a fixed one-time correction is also studied. A deferment of this correction is desirable when the initial state of the environmental stock is less deteriorated than the first-best steady state or the adjustment costs are sufficiently great.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
10809.
Length: Date of creation: 24 Oct 2003 Date of revision: Publication status: Published in European Economic Review, 1992, Vol. 36, pp. 1263-1276. Handle: RePEc:isu:genres:10809
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