Government Incentives when Pollution Permits are Durable Goods

Justus Haucap and Roland Kirstein

No 2001-06, CSLE Discussion Paper Series from Saarland University, CSLE - Center for the Study of Law and Economics

Abstract: This paper analyzes the incentive effects of pollution taxes versus pollution permits for a revenue maximizing Government that also pursues environmental objectives. In our model, pollution permits are analyzed as durable goods, and the leasing of pollution permits is seen as an equivalent to a pollution tax. We show that environmental policy based on durable pollution permits can be welfare superior to a pollution tax regime. The intuition is that a monopolistic Government would, in order to maximize its revenues, try to restrict the permit sales below the welfare maximizing level. While a pollution tax or leasing charge allows the Government to credibly commit to a monopoly level of pollution in future periods, a system based on durable permits weakens the monopolistic Government?s ability to credibly restrict future sales. Therefore, a pollution tax regime may be better for the environment and simultaneously increase Government revenues, but social welfare is larger with pollution permits. Hence, a regime where the Government cannot commit to monopoly quantities may be preferable from a welfare economic perspective. This argument in favor of durable permits complements more traditional arguments based on information asymmetries and innovation incentives.

Keywords: Emissions Permits; Pollution Tax; Time Inconsistency; Durable Goods (search for similar items in EconPapers)
JEL-codes: D7 H2 K3 (search for similar items in EconPapers)
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/23066/1/2001-06_pollution.pdf (application/pdf)

Related works:
Journal Article: Government Incentives When Pollution Permits Are Durable Goods (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:csledp:200106

Access Statistics for this paper

More papers in CSLE Discussion Paper Series from Saarland University, CSLE - Center for the Study of Law and Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().