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Rent Seeking Behavior and Optimal Taxation of Pollution in Shallow Lakes

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  • Salerno, Gillian
  • Beard, Rodney
  • McDonald, Stuart

Abstract

In this paper we extend earlier work on the economics of shallow lakes by M\"aler, Xepapadeas and de Zeeuw (2003) to the case where two communities have incommensurable preferences about lake eutrophication. In the case of incommensurable preferences interest group behavior arises, we therefore consider the case where society is divided into two interest groups and is thus unable to agree on a single management objective. In particular, the communities that share the use of the lake disagree on the relative importance of the shallow lake acting as a waste sink for phosphorus run-off as opposed to other ecosystem services. A dynamic game in which communities maximize their use of the lake results in a Nash equilibrium where the lake is in a eutrophic state when in fact the Pareto optimum would be for the lake to be in an oligotrophic state. Our paper differs from previous work by considering two communities or interest groups with different preferences for environmental services. The tax that would induce, in a noncooperative context, all of society's members to behave in such a way as to achieve a Pareto optimal outcome is derived under the assumption that a social planner does not favor one community or another. We then ask whether or not such a tax rate would in fact be implemented if each community were able to bear political pressure on the social planner and the social planner were a public representative seeking re-election. In this case both types of communities lobby to have their preferred level of tax applied based on their relative preferences for a clean lake and phosphorus loading. The effects of the lobbying on the application of the optimal tax are investigated numerically for particular values of relative preferences and the relative size of each group. The representative seeking election proposes a different tax rate in order to maximize their probability of electoral success. This problem is solved numerically assuming that the lake is in a eutrophic equilibrium. It is shown that political representatives have an incentive to propose tax rates that are insufficient to achieve a return to an oligotrophic steady-state

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11225.

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Date of creation: 2007
Date of revision: 22 Oct 2008
Handle: RePEc:pra:mprapa:11225

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Keywords: Pollution of shallow lakes; optimal eco-taxation; dynamic rent seeking;

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  1. Mäler, K-G. & Xepapadeas, A. & Zeeuw, A.J. de, 2003. "The economics of shallow lakes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-123314, Tilburg University.
  2. Mika Kato & Lars Gruene & Willi Semmler, 2002. "Solving Ecological Mangement Problems Using Dynamic Programming," Computing in Economics and Finance 2002 102, Society for Computational Economics.
  3. Engelbert J. Dockner & Florian O.O. Wagener, 2006. "Markov-Perfect Nash Equilibria in Models with a Single Capital Stock," Tinbergen Institute Discussion Papers 06-055/1, Tinbergen Institute.
  4. Kossioris, G. & Plexousakis, M. & Xepapadeas, A. & Zeeuw, A.J. de & Mäler, K-G., 2008. "Feedback Nash equilibria for non-linear differential games in pollution control," Open Access publications from Tilburg University urn:nbn:nl:ui:12-378255, Tilburg University.
  5. Wagener, F. O. O., 2003. "Skiba points and heteroclinic bifurcations, with applications to the shallow lake system," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1533-1561, July.
  6. Alaouze, Chris M., 1995. "A Short Run Economic Analysis of the Eutrophication Problem of the Barwon and Darling Rivers in New South Wales," 1995 Conference (39th), February 14-16, 1995, Perth, Australia 148806, Australian Agricultural and Resource Economics Society.
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