Pollution Control Instruments in the Presence of an Informal Sector

Sudeshna Chattopadhyay (), Sarmila Banerjee () and Katrin Millock ()
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Sudeshna Chattopadhyay: Bidhannagar College - EB-2 Sector - I
Sarmila Banerjee: University of Calcutta
Katrin Millock: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

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Abstract: We examines the challenges faced by the regulator in managing pollution when there is a linkage between a formal and an informal industrial sector across the stages of production. The formal sector is more productive than the informal sector and the latter saves cost by evading pollution regulation due to incomplete monitoring. This creates a natural tendency for the more polluting processes to be concentrated in the informal sector. We show the unintended effects of the standard Pigouvian tax (emission fee), which might lead to further deterioration by encouraging the shift of stages in favour of the informal sector. Instead, we propose a second-best hybrid instrument, comprised of a tax on polluting input and a subsidy on proper disposal of residual waste.

Keywords: Emissions tax; informal sector; pollution control; vertical production; Taxe pigouvienne; réduction de pollution; production verticale (search for similar items in EconPapers)
Date: 2010-12
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00560558v1
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Citations: View citations in EconPapers (6)

Published in 2010

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