Second-Best Environmental Policy and Nonconvexities : The Asymmetry Between Taxes and Tradeable Permits
In second-best environmental policies, nonconvexities arise because of decreasing marginal pollution abatement costs. In this case, we chow that, unlike tradeable permits, taxes may introduce incorrect incentives. Moreover, even when taxes lead to efficient solutions, the tax rate should not be based on marginal pollution abatement cost, but to average costs.
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