Taxes Versus Quotas for a Stock Pollutant

Fondazione Eni Enrico Mattei Working Paper No. 29.98

26 Pages Posted: 21 Sep 1998

See all articles by Michael Hoel

Michael Hoel

University of Oslo; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Larry S. Karp

University of California, Berkeley

Date Written: February 1998

Abstract

We compare the effects of taxes and quotas for an environmental problem in which the regulator and polluter have asymmetric information about abatement costs, and the environmental damage depends on the stock of pollution. We thus extend to a dynamic framework previous studies in which environmental damages depend on the flow of pollution. As with the static analysis, taxes are more likely to dominate quotas the greater is the curvature of the abatement cost function relative to the environmental damage function. However, in the dynamic model, an increase in the discount rate, the stock decay rate, or either the regulator?s or the firms? ability to make adjustments, all increase the likelihood that taxes dominate quotas. An empirical illustration of these results suggests that taxes dominate quotas for the control of greenhouse gasses.

JEL Classification: H21, Q28

Suggested Citation

Hoel, Michael and Karp, Larry S., Taxes Versus Quotas for a Stock Pollutant (February 1998). Fondazione Eni Enrico Mattei Working Paper No. 29.98, Available at SSRN: https://ssrn.com/abstract=128675 or http://dx.doi.org/10.2139/ssrn.128675

Michael Hoel (Contact Author)

University of Oslo ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+ 47 22 85 83 87 (Phone)
+ 47 22 85 50 35 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Larry S. Karp

University of California, Berkeley ( email )

Dept. of Agriculture & Resource Economics
313 Giannini Hall
Berkeley, CA 94720
United States
510-643-8911 (Fax)

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