Payment for Environmental Services and environmental tax under imperfect competition

Anneliese Krautkraemer and Sonia Schwartz

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Abstract: This paper designs the second-best Payment for Environmental Services (PES) when it interacts with a Pigouvian tax under imperfect competition. We consider farmers who face a choice between producing a conventional or an organic agriculture good. The regulator sets a Pigouvian tax on conventional agriculture as it generates environmental damages, as well as a PES on uncultivated land as buffer strips favor biodiversity. The conventional agriculture sector is perfectly competitive, unlike the organic agriculture sector, which is organized under an oligopoly. We show that the second-best level of the Pigouvian tax is higher than the marginal damage whereas the PES is lower than the marginal benefit. We then introduce the social marginal cost of public funds (MCF) and show that the Pigouvian tax increases with the MCF while the PES decreases with the MCF provided that demand for the conventional agriculture 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 Payement for Environmental Services Pigouvian Tax the Social Marginal Social Cost of Public Funds Market Power; Biodiversity Conservation; Payement for Environmental Services; Pigouvian Tax; the Social Marginal Social Cost of Public Funds; Market Power JEL Codes: Q57 (search for similar items in EconPapers)
Date: 2023-07-12
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04160411

DOI: 10.5281/zenodo.8131454

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