Government Incentives when Pollution Permits are Durable Goods |
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Authors: | Justus Haucap Roland Kirstein |
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Institution: | 1. Institute for Economic Policy, University of the Federal Armed Forces Hamburg, Holstenhofweg 85, D-22043, Hamburg, Germany 2. Center for the Study of Law and Economics (CSLE), University of Saarland, PO Box 151 150, D-66041, Saarbrücken, Germany
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Abstract: | This paper analyzes the incentive effects of pollution taxesversus pollution permits for a budget oriented Government.Pollution permits are analyzed as durable goods, and apollution tax is seen as being equivalent to leasing outpollution permits. First, a general model is developed, andthen four stylized types of Government are discussed (abenevolent dictator, a pure Leviathan, a green and a business-friendly Government). We show that all types of Governmentprefer a pollution tax system, but this regime is notnecessarily the best in social welfare terms. The intuition isthat a tax or leasing system makes it easier for theGovernment to credibly commit to the budget maximizing levelof pollution permits which is good for Government revenues,but not necessarily for social welfare. |
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