Corrective Taxes and Auctions of Rights in the Control of Externalities: Some Further Thoughts

Abstract

Taking as its point of departure the Holcombe-Meiners contention that a system of marketable pollution rights is susceptible to the monopolization of these rights as a means to forestall the entry of competitors, this article explores more broadly the relative merits of systems of effluent fees and of marketable rights for the control of pollution. The article suggests, first, that the Holcombe-Meiners problem concerning the use of pollution rights as a barrier to entry is likely to be inconsequential, and, second, that from a wider perspective, a system of marketable pollution rights under which the rights are initially distributed to existing polluters has some quite compelling advantages in practice over the economist's more traditional proposal for a system of effluent fees. It is, moreover, the direction in which environmental policy appears to be moving in the United States.