Rationally Expected Externalities: The Implications for Optimal Waste Discharge and Recycling
AbstractWhat if consumers' actions reveal concern for contributing to an externality, even without a pecuniary incentive? Within a two-level model, a policymaker prices disposal of waste, and a representative consumer chooses a consumption level for a dirty good and a division of the consequent waste between recycling and disposal; only disposal creates an externality. In the special case of rational expectations, each consumer accepts full responsibility for his contribution to the externality. A first-best optimum is then achieved by a form of Pigouvian pricing, assuming unconstrained income taxes/transfers. Otherwise, Pigouvian pricing is second-best, unless individuals disclaim all responsibility for the externality and utility has a separable form. The model explains why recycling may occur even with free waste-disposal.
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Bibliographic InfoPaper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number tep0112.
Length: 31 pages
Date of creation: Jan 2012
Date of revision:
externality; Pigouvian tax; separable utility; rational expectation; recycling;
Find related papers by JEL classification:
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-29 (All new papers)
- NEP-ENV-2012-07-29 (Environmental Economics)
- NEP-UPT-2012-07-29 (Utility Models & Prospect Theory)
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