On the Acceptability of the Ambient Tax Mechanism: An Experimental Investigation

Abstract

There is a common belief among nonpoint source pollution managers that ambient taxes are likely to raise acceptability problems. In this paper, we empirically assess the acceptability of ambient taxes. Concretely, we ask participants in an experiment to play the role of polluters who choose between (A) an ambient tax scheme and (B) an individual tax system (polluters are heterogeneous, with small, medium and large capacity polluters). In case (A), polluters' payoff depends on total emissions and on natural variability whereas in case (B) polluters earn a sure payoff. The sure payoff level reflects polluters' maximal profit under the individual tax system and ranges from 40% to 95% of polluters' expected payoff under the ambient tax scheme if the social optimum is achieved. For a given sure payoff level, we take the percentage of polluters preferring the ambient tax to the surepayoff as an indicator of the acceptability of the ambient tax scheme. We find that, though the rate of acceptance decreases with the level of the sure payoff, the acceptance rate remains high even when the sure payoff is almost as high as the social optimum payoff and large polluters are less likely to accept the ambient tax mechanism than small and medium polluters. Our experimental results mitigate the common belief that ambient taxes are unacceptable. Still, the acceptability of the instrument could be low in groups of highly heterogeneous polluters.

Keywords: Nonpoint Source Pollution, Group Decision Making, Experiments, Acceptability of fiscal instruments

JEL Classification: C92, H3, Q5