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A Stackelberg Model on Taxing Polluting Firms

Listed author(s):
  • Halkos, George

In this paper we propose a leader – follower dynamic model of taxation with the government imposing a tax to internalize externalities caused by polluting firms. As expected the Stackelberg games with the government acting as leader yield time inconsistent outcomes. We first show how time inconsistency can be avoided adopting specific utility functions. We then propose a pollution model that uses abatement as the value of accumulated pollution stock and find that the outcome of the proposed Stackelberg model is time consistent with an open – loop informational structure. This yields a tax factor that is time independent. Finally, we show that the result of the game is inefficient compared to the social planner dynamic game.

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File URL: https://mpra.ub.uni-muenchen.de/23741/1/MPRA_paper_23741.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23741.

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Date of creation: 2008
Handle: RePEc:pra:mprapa:23741
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Web page: https://mpra.ub.uni-muenchen.de

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  1. Xepapadeas, Anastasios, 2005. "Economic growth and the environment," Handbook of Environmental Economics,in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 3, chapter 23, pages 1219-1271 Elsevier.
  2. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
  3. Karp, Larry & Livernois, John, 1992. "On efficiency-inducing taxation for a non-renewable resource monopolist," Journal of Public Economics, Elsevier, vol. 49(2), pages 219-239, November.
  4. Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 263-274.
  5. Kemp, Murray C & Long, Ngo Van & Shimomura, Koji, 1993. "Cyclical and Noncyclical Redistributive Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 415-429, May.
  6. Krusell, Per, 2002. "Time-consistent redistribution," European Economic Review, Elsevier, vol. 46(4-5), pages 755-769, May.
  7. Benchekroun, Hassan & van Long, Ngo, 1998. "Efficiency inducing taxation for polluting oligopolists," Journal of Public Economics, Elsevier, vol. 70(2), pages 325-342, November.
  8. Xie, Danyang, 1997. "On Time Inconsistency: A Technical Issue in Stackelberg Differential Games," Journal of Economic Theory, Elsevier, vol. 76(2), pages 412-430, October.
  9. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
  10. Ines Lindner & Holger Strulik, 2004. "Distributive politics and economic growth: the Markovian Stackelberg solution," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(2), pages 439-444, January.
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