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The insufficiency of Pigouvian taxes in a spatial general equilibrium model

Listed author(s):
  • Sakari Uimonen


    (Department of Economics, P.O. Box 54, FIN-00014 University of Helsinki, Finland)

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    The paper considers, in a spatial general equilibrium setting, the pollution externality problem caused by a competitive industry. It is shown that the pollution control instrument supporting the optimum is a two-part Pigouvian tax-emission rights scheme in which the polluter pays only for the emissions which exceed its initial emission rights. The optimal level of the emission rights depends on the nature of pollution. In the global pollution case they are zero, whereas in the local pollution case they are equal to the firm's emissions at the optimum. In general, the optimal initial emission rights are between these values, but they may also be negative. In the latter case the firm pays for a greater amount of emissions than it emits. The emission tax proceeds, if there are any, must be distributed to the victims (households) as compensation.

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    Article provided by Springer & Western Regional Science Association in its journal The Annals of Regional Science.

    Volume (Year): 35 (2001)
    Issue (Month): 2 ()
    Pages: 283-298

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    Handle: RePEc:spr:anresc:v:35:y:2001:i:2:p:283-298
    Note: Received: December 1998/Accepted: May 2000
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