Government Incentives when Pollution Permits are Durable Goods
AbstractThis paper analyzes the incentive effects of pollution taxes versus pollution permits for a revenue maximizing Government that also pursues environmental objectives. In our model, pollution permits are analyzed as durable goods, and the leasing of pollution permits is seen as an equivalent to a pollution tax. We show that environmental policy based on durable pollution permits can be welfare superior to a pollution tax regime. The intuition is that a monopolistic Government would, in order to maximize its revenues, try to restrict the permit sales below the welfare maximizing level. While a pollution tax or leasing charge allows the Government to credibly commit to a monopoly level of pollution in future periods, a system based on durable permits weakens the monopolistic Government?s ability to credibly restrict future sales. Therefore, a pollution tax regime may be better for the environment and simultaneously increase Government revenues, but social welfare is larger with pollution permits. Hence, a regime where the Government cannot commit to monopoly quantities may be preferable from a welfare economic perspective. This argument in favor of durable permits complements more traditional arguments based on information asymmetries and innovation incentives. --
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Bibliographic InfoPaper provided by Saarland University, CSLE - Center for the Study of Law and Economics in its series CSLE Discussion Paper Series with number 2001-06.
Date of creation: 2001
Date of revision:
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More information through EDIRC
Emissions Permits; Pollution Tax; Time Inconsistency; Durable Goods;
Other versions of this item:
- Haucap, Justus & Kirstein, Roland, 2003. " Government Incentives When Pollution Permits Are Durable Goods," Public Choice, Springer, vol. 115(1-2), pages 163-83, April.
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- K3 - Law and Economics - - Other Substantive Areas of Law
- D7 - Microeconomics - - Analysis of Collective Decision-Making
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