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Government Incentives When Pollution Permits Are Durable Goods

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  • Haucap, Justus
  • Kirstein, Roland

Abstract

This paper analyzes the incentive effects of pollution taxes versus pollution permits for a budget oriented Government. Pollution permits are analyzed as durable goods, and a pollution tax is seen as being equivalent to leasing out pollution permits. First, a general model is developed, and then four stylized types of Government are discussed (a benevolent dictator, a pure Leviathan, a green and a business-friendly Government). We show that all types of Government prefer a pollution tax system, but this regime is not necessarily the best in social welfare terms. The intuition is that a tax or leasing system makes it easier for the Government to credibly commit to the budget maximizing level of pollution permits which is good for Government revenues, but not necessarily for social welfare. Copyright 2003 by Kluwer Academic Publishers

Suggested Citation

  • Haucap, Justus & Kirstein, Roland, 2003. "Government Incentives When Pollution Permits Are Durable Goods," Public Choice, Springer, vol. 115(1-2), pages 163-183, April.
  • Handle: RePEc:kap:pubcho:v:115:y:2003:i:1-2:p:163-83
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    1. Wirl, Franz & Dockner, Engelbert, 1995. "Leviathan governments and carbon taxes: Costs and potential benefits," European Economic Review, Elsevier, vol. 39(6), pages 1215-1236, June.
    2. Bagnoli, Mark & Salant, Stephen W & Swierzbinski, Joseph E, 1989. "Durable-Goods Monopoly with Discrete Demand," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1459-1478, December.
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    4. Denicolo, Vincenzo, 1999. "Pollution-Reducing Innovations under Taxes or Permits," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 184-199, January.
    5. Biglaiser, Gary & Horowitz, John K & Quiggin, John, 1995. "Dynamic Pollution Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 33-44, July.
    6. von der Fehr, Nils-Henrik Morch & Kuhn, Kai-Uwe, 1995. "Coase versus Pacman: Who Eats Whom in the Durable-Goods Monopoly?," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 785-812, August.
    7. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-332, April.
    8. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
    9. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
    10. Fredriksson, Per G., 1997. "The Political Economy of Pollution Taxes in a Small Open Economy," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 44-58, May.
    11. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and environmental innovation," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 127-140, October.
    12. Till Requate, 1995. "Incentives to adopt new technologies under different pollution-control policies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(2), pages 295-317, August.
    13. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    14. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
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    Cited by:

    1. Leon Vinokur, 2009. "Environmental Policy under Ambiguity," Working Papers 638, Queen Mary University of London, School of Economics and Finance.
    2. Kirchgassner, Gebhard & Schneider, Friedrich, 2003. "On the Political Economy of Environmental Policy," Public Choice, Springer, vol. 115(3-4), pages 369-396, June.
    3. Haucap, Justus & Kirstein, Roland, 2002. "Warum Staaten Ökosteuern statt Lizenzen einführen, und wann das schlecht für die Wohlfahrt ist," CSLE Discussion Paper Series 2002-07, Saarland University, CSLE - Center for the Study of Law and Economics.
    4. Eva Schliephake, 2013. "Risk Weighted Capital Regulation and Government Debt," FEMM Working Papers 130011, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    5. Rajeev Goel, 2006. "Uncertain innovation with uncertain product durability," Applied Economics Letters, Taylor & Francis Journals, vol. 13(13), pages 829-834.
    6. Halkos, George, 2009. "A Differential game approach in the case of a polluting oligopoly," MPRA Paper 23742, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • 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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