Government Incentives When Pollution Permits are Durable Goods

Posted: 30 Oct 2002

See all articles by Justus Haucap

Justus Haucap

Heinrich Heine University Dusseldorf - Department of Economics; German Institute for Economic Research (DIW Berlin)

Roland Kirstein

University of Magdeburg - Economics of Business and Law

Abstract

This paper analyzes the incentive effects of pollution taxes versus pollution permits for a budget oriented Government. Pollution permits are analyzed as durable goods, and a pollution tax is seen as an equivalent to leasing pollution permits. First, a general model is developed and then four stylized types of Government are discussed (a benevolent dictator, a pure Leviathan, a green and a business-friendly Government). We show that all types of Government prefer a pollution tax system, but this regime is not necessarily the best in social welfare terms. The intuition is that a tax or leasing system makes it easier for the Government to credibly commit to the budget maximizing level of pollution permits which is good for Government revenues, but not necessarily for social welfare.

Keywords: Emissions Permits, Pollution Tax, Time Inconsistency, Durable Goods

JEL Classification: D7, H2, K3

Suggested Citation

Haucap, Justus and Kirstein, Prof. Dr. Roland, Government Incentives When Pollution Permits are Durable Goods. Available at SSRN: https://ssrn.com/abstract=325920

Justus Haucap

Heinrich Heine University Dusseldorf - Department of Economics ( email )

Duesseldorf
Germany

HOME PAGE: http://www.dice.uni-duesseldorf.de

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Prof. Dr. Roland Kirstein (Contact Author)

University of Magdeburg - Economics of Business and Law ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany
+493916718729 (Phone)
+493916711764 (Fax)

HOME PAGE: http://www.ww.uni-magdeburg.de/bizecon

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