On Optimal Pollution Control Policies

In recent years, on the basis of static allocative efficiency properties economists have advocated the use of taxation as an economically efficient means of control to implement environmental protection policy. Environmental problems, however, do not always develop smoothly and gradually but are often characterized by infrequent serious crises that require rapid, but temporary, changes in the controlling mechanism. Tax policy is inappropriate for such crises, but direct controls can be implemented rapidly to handle such emergencies. Using simple stochastic models to represent the physical environment, we show that the pollution control policy which minimizes total social costs (stationary social costs plus short-term emergency costs) is a mixed policy in which taxes are used to control the long-run equilibrium level of pollution and direct controls are used in short-term emergencies to maintain the pollution at satisfactory level. We also show that although tax policy alone is not optimal, in some special circumstances, direct controls alone may be the optimal way to control pollution.