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An Algorithm for Optimal Pigouvian Taxes Without Benefits Data

  • Salvatore Bimonte

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    The Pigouvian prescription to internalize external diseconomies and to achieve the optimum social equilibrium is well known: a unit tax on polluting activities equal to the marginal social damage arising at the after-tax optimal level of activity. If an authority imposes an effluent fee on emissions equal to the marginal social damage, the resulting equilibrium is Pareto-efficient. It has not been possible to translate the Pigouvian dictum into actual because of the problem of quantifying such a tax and its heavy subjective information requirements. This makes the monetary value of the damage difficult to determine. In order to overcome this difficulty, this paper develops a different theoretical approach. The main goal is to provide the environmental authority with an algorithm which allows policy-makers to base decisions on technical data (i.e. firms' production functions) rather than on subjective information (i.e. individuals' utility functions). The paper illustrates advantages offered by this approach, providing some theoretical and practical conditions useful in calculating the optimal tax. Copyright Kluwer Academic Publishers 1999

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    File URL: http://hdl.handle.net/10.1023/A:1008369309030
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    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 13 (1999)
    Issue (Month): 1 (January)
    Pages: 1-11

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    Handle: RePEc:kap:enreec:v:13:y:1999:i:1:p:1-11
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    1. Miller, Jon R & Lad, Frank, 1984. "Flexibility, learning, and irreversibility in environmental decisions: A bayesian approach," Journal of Environmental Economics and Management, Elsevier, vol. 11(2), pages 161-172, June.
    2. Wittman, Donald, 1985. "Pigovian taxes which work in the small-number case," Journal of Environmental Economics and Management, Elsevier, vol. 12(2), pages 144-154, June.
    3. Stephen Smith, 1992. "Taxation and the environment: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 13(4), pages 21-57, January.
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