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Government Incentives When Pollution Permits Are Durable Goods

  • Haucap, Justus
  • Kirstein, Roland

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

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Article provided by Springer in its journal Public Choice.

Volume (Year): 115 (2003)
Issue (Month): 1-2 (April)
Pages: 163-83

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Handle: RePEc:kap:pubcho:v:115:y:2003:i:1-2:p:163-83
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  1. 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.
  2. Till Requate, 1995. "Incentives to adopt new technologies under different pollution-control policies," International Tax and Public Finance, Springer, vol. 2(2), pages 295-317, August.
  3. Laffont, J.J. & Tirole, J., 1995. "Pollution Permits and Environmental Innovation," Papers 95.396, Toulouse - GREMAQ.
  4. 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.
  5. Gersbach, Hans & Glazer, Amihai, 1998. "Markets and regulatory hold-up problems," University of California Transportation Center, Working Papers qt9gf9t35g, University of California Transportation Center.
  6. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  7. Biglaiser, Gary & Horowitz, John K & Quiggin, John, 1995. "Dynamic Pollution Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 33-44, July.
  8. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  9. 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.
  10. 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.
  11. V. Denicolo, 1997. "Pollution-Reducing Innovations Under Taxes or Permits," Working Papers 281, Dipartimento Scienze Economiche, Universita' di Bologna.
  12. 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.
  13. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  14. 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 1459-78, December.
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