Government Incentives When Pollution Permits are Durable Goods
Posted: 30 Oct 2002
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
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