Coase, Hayek, Pigou and Walras: Taxes vs Permit Auctions in Environmental Policy
William Dougan and
Charles Thomas ()
Man and the Economy, 2014, vol. 1, issue 2, 12
When policymakers are uncertain about the private costs of pollution abatement, using simple auctions that jointly determine the price and quantity of pollution permits enables them to set precisely the quantity of pollution they would choose if they knew abatement costs perfectly. Auctioning an endogenously determined number of tradable permits therefore yields greater expected net welfare than does a Pigovian tax that reflects policymakers’ best estimate of the efficient tax level. This conclusion holds regardless of polluters’ specific abatement-cost functions, which contrasts with the well-known analysis of Weitzman (1974) that compares the choice between taxing pollution and allocating a fixed number of permits when information is incomplete.
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