Optimal Taxation of a Polluting Durable Goods Monopolist

Abstract

The authors consider optimal taxation in a two-period model of a durable goods monopolist where pollution is a byproduct of production. In the case where the firm rents its output, the optimal tax is lower than the tax placed on a competitive industry, all else held constant. When the monopolist sells its output, the tax will be larger than in the rental case. The authors find that this is due to the "Coase conjecture" that durable goods sales monopolists will be forced nearer to marginal cost pricing than will durable goods rental monopolists. They also show that Buchanan's result that the optimal pollution tax on a simple monopolist is less than the optimal pollution tax on a competitive industry generally holds for the case where the monopolist sells durable goods. However, an exception to this occurs when production costs decrease at the margin. In the durable goods case, Buchanan's result may be reversed. This is not the case when the goods are nondurable.