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Coase, Hayek, Pigou and Walras: Taxes vs Permit Auctions in Environmental Policy

Author

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  • Dougan William R.

    (John E. Walker Department of Economics, Clemson University, 228 Sirrine Hall, Clemson, SC 29634-1309, USA)

  • Thomas Charles J.

    (Affiliated Research Scientist, Economic Science Institute & Argyros School of Business and Economics, Chapman University, 1 University Drive, Orange, CA 92866, USA)

Abstract

When policymakers are uncertain about the private costs of pollution abatement, using simple auctions that jointly determine the price and quantity of pollution permits enables them to set precisely the quantity of pollution they would choose if they knew abatement costs perfectly. Auctioning an endogenously determined number of tradable permits therefore yields greater expected net welfare than does a Pigovian tax that reflects policymakers’ best estimate of the efficient tax level. This conclusion holds regardless of polluters’ specific abatement-cost functions, which contrasts with the well-known analysis of Weitzman (1974) that compares the choice between taxing pollution and allocating a fixed number of permits when information is incomplete.

Suggested Citation

  • Dougan William R. & Thomas Charles J., 2014. "Coase, Hayek, Pigou and Walras: Taxes vs Permit Auctions in Environmental Policy," Man and the Economy, De Gruyter, vol. 1(2), pages 1-12, December.
    • Handle: RePEc:bpj:maneco:v:1:y:2014:i:2:p:12:n:4
    DOI: 10.1515/me-2014-0021
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    References listed on IDEAS

    as
    1. Cramton, Peter & Kerr, Suzi, 2002. "Tradeable carbon permit auctions: How and why to auction not grandfather," Energy Policy, Elsevier, vol. 30(4), pages 333-345, March.
    2. Martinez-Vazquez,Jorge & Winer,Stanley L. (ed.), 2014. "Coercion and Social Welfare in Public Finance," Cambridge Books, Cambridge University Press, number 9781107636897.
    3. Martinez-Vazquez,Jorge & Winer,Stanley L. (ed.), 2014. "Coercion and Social Welfare in Public Finance," Cambridge Books, Cambridge University Press, number 9781107052789.
    4. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December.
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    Cited by:

    1. Casey B. Mulligan, 2015. "In-Kind Taxes, Behavior, and Comparative Advantage," NBER Working Papers 21586, National Bureau of Economic Research, Inc.

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