Rationally Expected Externalities: The Implications for Optimal Waste Discharge and Recycling

R.A. Somerville ()
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R.A. Somerville: Department of Economics, Trinity College Dublin

Economic Papers from Trinity College Dublin, Economics Department

Abstract: What if consumers' actions reveal concern for contributing to an externality, even without a pecuniary incentive? Within a two-level model, a policymaker prices disposal of waste, and a representative consumer chooses a consumption level for a dirty good and a division of the consequent waste between recycling and disposal; only disposal creates an externality. In the special case of rational expectations, each consumer accepts full responsibility for his contribution to the externality. A first-best optimum is then achieved by a form of Pigouvian pricing, assuming unconstrained income taxes/transfers. Otherwise, Pigouvian pricing is second-best, unless individuals disclaim all responsibility for the externality and utility has a separable form. The model explains why recycling may occur even with free waste-disposal.

Keywords: externality; Pigouvian tax; separable utility; rational expectation; recycling (search for similar items in EconPapers)
JEL-codes: D11 D21 H23 Q5 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2012-01
New Economics Papers: this item is included in nep-env and nep-upt
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