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Gullibility and Welfare in an Environmental Taxation Game

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  • Christophe Deissenberg

    ()
    (Universite d'Aix-Marseille II and GREQAM)

  • Herbert Dawid

    (University of Bielefeld)

  • Pavel Å evÄ?ík

    (Université de Montréal)

Abstract

We consider a simple dynamic model of environmental taxation that exhibits time inconsistency. There are two categories of firms, Believers, who take the tax announcements made by the Regulator to face value, and Non-Believers, who perfectly anticipate the Regulator's decisions, albeit at a cost. The proportion of Believers and Non-Believers changes over time depending on the relative profits of both groups. We show that the Regulator can use misleading tax announcements to steer the economy to an equilibrium that is Pareto superior to the solutions usually suggested in the literature. Depending upon the initial proportion of Believers, the Regulator may prefer a fast or a low speed of reaction of the firms to differences in Believers/Non-Believers profits

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 505.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:505

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Cited by:
  1. Pedro, de Mendonça, 2009. "Self-Enforcing Climate Change Treaties: A Generalized Differential Game Approach with Applications," MPRA Paper 17889, University Library of Munich, Germany.
  2. David Bartolini, 2006. "Integrated versus Separated Regulation: An Application to the Water Industry," Economics Discussion Papers, University of Essex, Department of Economics 607, University of Essex, Department of Economics.

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