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CSLE Discussion Paper Series, CSLE - Center for the Study of Law and Economics, Universität des Saarlandes >
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http://hdl.handle.net/10419/23066
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| Title: | | Government Incentives when Pollution Permits are Durable Goods  |
| Authors: | | Haucap, Justus Kirstein, Roland |
| Issue Date: | | 2001 |
| Series/Report no.: | | CSLE Discussion Paper 2001-06 |
| 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. |
| Subjects: | | Emissions Permits Pollution Tax Time Inconsistency Durable Goods |
| JEL: | | H2 K3 D7 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CSLE Discussion Paper Series, CSLE - Center for the Study of Law and Economics, Universität des Saarlandes
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