Durable Emissions and Optimal Pigouvian Taxes

Abstract

This article examines the effectiveness of socially optimal taxes in controlling pollution (or other external effects) generated by a monopolist when pollution is a by-product of production and when emissions themselves are durable. Existing research has paid inadequate attention to the durability aspect, both of the product and of the resulting pollutants. In the two-period model presented here, a social planner minimizes social damage by setting the per-unit Pigouvian tax on a polluting monopolist. Results show that for a given level of production, the durability of emissions and the socially optimal Pigouvian tax are negatively related. This result holds irrespective of the durability of the good under production. The effect of a change in product durability is shown to depend on the output scale effects. Public policy implications are discussed.