Instant Efficient Pollution Abatement under Non-Linear Taxation and Asymmetric Information: The Differential Tax Revisited

Paul Mensink
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Paul Mensink: Independent

No 2004.124, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper analyzes incentives for polluting firms to exchange abatement cost information under the non-linear pollution tax scheme (‘differential tax’) introduced by Kim and Chang [J. Regul. Econom. 5, 1993, 193-197]. It shows that polluting firms have - under mild conditions - an incentive to join a coalition whose members mutually truthfully exchange information as well as commit themselves with respect to their abatement decisions. As a result, the differential tax triggers instantly - i.e. no abatement adaptation is needed – efficient abatement levels without the regulator knowing marginal abatement costs. Consequently, this paper shows that differential taxation results in lower social costs than traditional non-linear taxation which triggers efficient emissions only after a period of non-efficient abatement.

Keywords: Externalities; Pollution taxes; Coalition formation; Non-linear taxation; Asymmetric information; Co-operative game theory (search for similar items in EconPapers)
JEL-codes: C71 D62 D82 Q20 (search for similar items in EconPapers)
Date: 2004-10
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