Instant Efficient Pollution Abatement Under Non-Linear Taxation and Asymmetric Information: The Differential Tax Revisited
27 Pages Posted: 5 Oct 2004
Date Written: July 2004
This paper analyzes incentives for polluting firms to exchange abatement cost information under the non-linear pollution tax scheme ('differential tax') introduced by Kim and Chang [J. Regul. Econom. 5, 1993, 193-197]. It shows that polluting firms have - under mild conditions - an incentive to join a coalition whose members mutually truthfully exchange information as well as commit themselves with respect to their abatement decisions. As a result, the differential tax triggers instantly - i.e., no abatement adaptation is needed - efficient abatement levels without the regulator knowing marginal abatement costs. Consequently, this paper shows that differential taxation results in lower social costs than traditional non-linear taxation which triggers efficient emissions only after a period of non-efficient abatement.
Keywords: Externalities, pollution taxes, coalition formation, non-linear taxation, asymmetric information, cooperative game theory
JEL Classification: C71, D62, D82, Q20
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