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Rationally Expected Externalities: The Implications for Optimal Waste Discharge and Recycling

Listed author(s):
  • R.A. Somerville


    (Department of Economics, Trinity College Dublin)

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    What if consumers' actions reveal concern for contributing to an externality, even without a pecuniary incentive? Within a two-level model, a policymaker prices disposal of waste, and a representative consumer chooses a consumption level for a dirty good and a division of the consequent waste between recycling and disposal; only disposal creates an externality. In the special case of rational expectations, each consumer accepts full responsibility for his contribution to the externality. A first-best optimum is then achieved by a form of Pigouvian pricing, assuming unconstrained income taxes/transfers. Otherwise, Pigouvian pricing is second-best, unless individuals disclaim all responsibility for the externality and utility has a separable form. The model explains why recycling may occur even with free waste-disposal.

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    Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number tep0112.

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    Length: 31 pages
    Date of creation: Jan 2012
    Handle: RePEc:tcd:tcduee:tep0112
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    Trinity College, Dublin 2

    Phone: (+ 353 1) 6081325
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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    2. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
    3. Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, Oxford University Press, vol. 4(1), pages 1-17, January.
    4. R. A. Somerville, 2007. "Differentiable Technology, the Curvature of the Profit Function, and the Response of Supply to Own-Price Changes," The Journal of Economic Education, Taylor & Francis Journals, vol. 38(2), pages 222-228, April.
    5. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, October.
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