Phosphorus conservation, eutrophication reduction and social welfare improvement: taxation of extracted phosphorus or subsidy of recycled phosphorus ?

This paper aims at analyzing the role of an environmental tax or an environmental subsidy as instruments for preserving phosphate reserves, for improving water quality by reducing eutrophication, and for increasing social welfare. Toward these goals, we use a duopoly model "à la Stack- elberg", assume the presence of a benevolent government that takes into account the bene.cial e¤ect of recycling in the social welfare function and refunds the revenue of the tax to the society. First, we .nd that taxing extracted phosphorus or subsidizing recycled phosphorus contributes to the postponement of the depletion of the resource and to the reduction of eutrophication. Second, we .nd that taxing extracted phosphorus reduces consumers.surplus, whereas subsidizing recycled phosphorus increases it. Third, we show that the subsidy set by the regulator is higher than the marginal bene.t of recycling, whereas the level of the tax with respect to the marginal social damage of pollution is ambiguous. Fourth, we state that the tax and the subsidy increase social welfare. Fifth, by way of com- parison, we .nd that if the regulator aims at saving phosphorus, reducing eutrophication and improving social welfare simultaneously, subsidizing recycled phosphorus is the best policy, but if he aims only at saving phos- phorus and reducing eutrophication, taxing extracted phosphorus is more optimal than subsidizing recycled phosphorus.