Pigou and Clarke join hands

Hans-Werner Sinn

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: This paper develops a simple, incentive compatible, allocation mechanism by means of which both polluters and pollutees will reveal their preferences so that the government can determine the Pareto optimal pollution level. The mechanism involves a combination of the Pigou tax and the Clarke tax. The two taxes are complementary and together provide a practical solution to the environment problem. The mechanism is applied to the problem of finding the optimal quality of river water which serves both as a waste disposal and as a source of drinking water.

Date: 1993
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Published in Public Choice 1 75(1993): pp. 79-91

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