The insufficiency of Pigouvian taxes in a spatial general equilibrium model

Sakari Uimonen ()
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Sakari Uimonen: Department of Economics, P.O. Box 54, FIN-00014 University of Helsinki, Finland

The Annals of Regional Science, 2001, vol. 35, issue 2, 283-298

Abstract: The paper considers, in a spatial general equilibrium setting, the pollution externality problem caused by a competitive industry. It is shown that the pollution control instrument supporting the optimum is a two-part Pigouvian tax-emission rights scheme in which the polluter pays only for the emissions which exceed its initial emission rights. The optimal level of the emission rights depends on the nature of pollution. In the global pollution case they are zero, whereas in the local pollution case they are equal to the firm's emissions at the optimum. In general, the optimal initial emission rights are between these values, but they may also be negative. In the latter case the firm pays for a greater amount of emissions than it emits. The emission tax proceeds, if there are any, must be distributed to the victims (households) as compensation.

JEL-codes: D62 H23 R13 (search for similar items in EconPapers)
Date: 2001-06-18
Note: Received: December 1998/Accepted: May 2000
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Citations: View citations in EconPapers (2)

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