The insufficiency of Pigouvian taxes in a spatial general equilibrium model

Abstract

The paper considers, in a spatial general equilibrium setting, the pollution externality problem caused by a competitive industry. It is shown that the pollution control instrument supporting the optimum is a two-part Pigouvian tax±emission rights scheme in which the polluter pays only for the emissions which exceed its initial emission rights. The optimal level of the emission rights depends on the nature of pollution. In the global pollution case they are zero, whereas in the local pollution case they are equal to the ®rm's emissions at the optimum. In general, the optimal initial emission rights are between these values, but they may also be negative. In the latter case the ®rm pays for a greater amount of emissions than it emits. The emission tax proceeds, if there are any, must be distributed to the victims (households) as compensation.

Shadow Market Area for Air Pollutants

“…Such a type of`urban economics location model' would provide a theoretical (and also empirical) framework in which the Coasian dimension of the problem shown in this study could be dealt with in a more rich and nuanced manner. In order to accomplish this task, two strands of literature should also be drawn on, which include the references surrounding the Coasian property rights in a land-market setting (Fischel, 1978;1985;Webster and Wu, 1999;2001) and those on the new economic geography concerned with self-organisation of agglomeration patterns (Donaghy 2004;Fujita and Krugman, 2004)…”

“…As shown above, there exists a kind of shadow price for a unit of polluted air if the so-called`strict liability' payment to victims (Shavell, 1984) applies in the context of Coase theorem (5) and if this price is larger than zero. (6) This unit shadow price can (4) Uimonen (2001) suggests, on the basis of a spatial general equilibrium model, that``the optimal pollution control instrument has two parts [namely a Pigouvian tax and an emission rights scheme]. The assignment of an initial emission right [scheme] takes care of the problem of an inordinate number of [polluting] firms.…”

The environment in regional science: An eclectic review

“…This viewpoint has been challenged by a number of researchers such as Loury (1980, 1986). Recently, Uimonen (2001) has used a spatial general equilibrium model and pointed out that a single instrument such as a Pigouvian tax is not adequate to restore economic efficiency in a polluted environment. To see why this is the case, note that in a competitive setting with pollution, the same environment is both a common property resource for firms entering the industry and an external diseconomy for current victims.…”

Emission taxes when pollution depends on location

“…Over the past 30 years, a number of studies in the fields of urban/regional and environmental economics have also pursued this line of investigation 1 . Some theoretical contributions, such as Xepapadeas (1992) and Uimonen (2001), sought to develop sophisticated price instruments. Applied works, on the other hand, often built on novel technologies, such as Geographic Information Systems (GIS), which are now helping environmental economists to collect and use spatial data 2…”