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The insufficiency of Pigouvian taxes in a spatial general equilibrium model

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  • Sakari Uimonen

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

Abstract

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.

Suggested Citation

  • Sakari Uimonen, 2001. "The insufficiency of Pigouvian taxes in a spatial general equilibrium model," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 35(2), pages 283-298.
  • Handle: RePEc:spr:anresc:v:35:y:2001:i:2:p:283-298 Note: Received: December 1998/Accepted: May 2000
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    Cited by:

    1. David Meintrup & Chang Woon Nam, 2009. "Shadow market area for air pollutants," Environment and Planning B: Planning and Design, Pion Ltd, London, vol. 36(4), pages 664-681, July.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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