Payment for Environmental Services and Environmental Tax Under Imperfect Competition

Krautkraemer Anneliese () and Schwartz Sonia ()
Additional contact information
Krautkraemer Anneliese: Université de Lorraine, Université de Strasbourg, AgroParisTech, CNRS, INRAE, BETA, 54000 Nancy, France
Schwartz Sonia: LEO-UCA, Université Clermont Auvergne, Université d’Orléans, LEO, 45067 Orléans, France

The B.E. Journal of Economic Analysis & Policy, 2025, vol. 25, issue 4, 819-847

Abstract: This paper designs the second-best Payment for Environmental Services (PES) when it interacts with a Pigouvian tax under market imperfections. Following Lankoski and Ollikainen (2003. “Agri-Environmental Externalities: A Framework for Designing Targeted Policies.” European Review of Agricultural Economics 30 (1): 51–75), we study the optimal allocation of land between two crops with different environmental impacts and fallow land. The regulator sets a Pigouvian tax on the agricultural production generating environmental damage and a PES on uncultivated land, as fallow buffer strips promote biodiversity. We assume an economy with market power and distortionary taxation. We show that the second-best level of the Pigouvian tax is higher than the marginal damage, contrary to Barnett (1980. “The Pigouvian Tax Rule Under Monopoly.” The American Economic Review 70 (5): 1037–41) whereas the PES is lower than the marginal benefit. The Pigouvian tax increases with the marginal social cost of public funds while the PES decreases with the marginal social cost of public funds provided that demand for the environmentally damaging agricultural good is inelastic. We thus highlight a contributory component of the environmental incentive tax. This paper also identifies specific cases where the PES is ineffective in promoting biodiversity.

Keywords: biodiversity conservation; payment for environmental services; Pigouvian tax; the marginal social cost of public funds; market power (search for similar items in EconPapers)
JEL-codes: Q57 Q58 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/bejeap-2024-0127 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:bejeap:v:25:y:2025:i:4:p:819-847:n:1001

Ordering information: This journal article can be ordered from
https://www.degruyte ... rnal/key/bejeap/html

DOI: 10.1515/bejeap-2024-0127

Access Statistics for this article

The B.E. Journal of Economic Analysis & Policy is currently edited by Hendrik Jürges and Sandra Ludwig

More articles in The B.E. Journal of Economic Analysis & Policy from De Gruyter
Bibliographic data for series maintained by Peter Golla ().