Controlling Stock Externalities: Flexible Versus Inflexible Pigovian Corrections

Il Dong Ko, Harvey Lapan and Todd Sandler

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper examines the use of inflexible Pigovian taxes/subsidies to correct a stock externality. An optimal control framework is first used to characterize the first-best path for a Pigovian correction that varies continuously. This first-best path is then contrasted with inflexible second-best paths in which the level of the correction can be set only once or twice. The optimal timing of a fixed one-time correction is also studied. A deferment of this correction is desirable when the initial state of the environmental stock is less deteriorated than the first-best steady state or the adjustment costs are sufficiently great.

Date: 1992-01-01
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Citations: View citations in EconPapers (11)

Published in European Economic Review 1992, vol. 36, pp. 1263-1276

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Journal Article: Controlling stock externalities: Flexible versus inflexible Pigovian corrections (1992)
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