POLLUTION CONTROL VERSUS ABATEMENT: IMPLICATIONS FOR TAXATION UNDER ASYMMETRIC INFORMATION

Abstract

This paper examines optimal taxation policies for controlling pollution under asymmetric information. Two important aspects of the social costs of pollution control are included: firstly, if a firm is not competitive, the shadow price of profits is less than unity, so that any reduction in profits due to pollution control should be weighted appropriately in welfare; secondly, control cost functions differ qualitatively if emissions are controlled by ex post abatement or by changing the whole production process. In the first case too much pollution occurs at the second-best optimum, while in the second, too little results.