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Environmental taxes in the long run

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  • Vetter, Henrik

Abstract

The efficiency of the Pigouvian tax suggests that price-based regulation is the proper benchmark for efficient regulation. However, results due to Carlton and Loury (1980, 1986) question this; when harm depends on scale effects a pure Pigou tax is inefficient regulation in the long run. In this note we make precise that there is an efficient tax scheme for controlling harm as long as social optimum exists. In particular, the efficient tax scheme is based on a tax rate equal to marginal harm. Hence, price regulation is the right benchmark for regulation even in the presence of scale effects in the harm function.

Suggested Citation

  • Vetter, Henrik, 2013. "Environmental taxes in the long run," Economics Discussion Papers 2013-29, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201329
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    References listed on IDEAS

    as
    1. Barnett, A H, 1980. "The Pigouvian Tax Rule under Monopoly," American Economic Review, American Economic Association, vol. 70(5), pages 1037-1041, December.
    2. Baumol, William J, 1979. "Quasi Optimality: The Price We Must Pay for a Price System," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 578-599, June.
    3. Kazuhiko Kato, 2011. "Emission quota versus emission tax in a mixed duopoly," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 13(1), pages 43-63, January.
    4. Dennis W. Carlton & Glenn C. Loury, 1986. "The Limitation of Pigouvian Taxes as a Long-Run Remedy for Externalities: An Extension of Results," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 631-634.
    5. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    6. Arwin Pang & Daigee Shaw, 2011. "Optimal emission tax with pre-existing distortions," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 13(2), pages 79-88, June.
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    More about this item

    Keywords

    externalities; scale effects; Pigou-taxes;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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