Prices, Quantities, and Correlated Externalities
This paper provides an answer to the question, are emission taxes an efficient and self-enforcing mechanism to control correlated externality problems? By “correlated externality” we mean multiple pollutants that are jointly produced by a single source but which cause differentiated regional and global externalities. By “self-enforcing” we mean mechanisms that account for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. We find that, unlike joint domestic and international tradable permit markets, joint emissions taxes are neither efficient nor self-enforcing.
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