PIGOVIAN TAXES, POLLUTER SUBSIDIES, REGULATION, AND THE SIZE OF A POLLUTING INDUSTRY

Baumol and Oates argue that is a Pigovian tax is set equal to the level of marginal damage at the Pareto-optimal level of pollution the industry will move towards its optimal pollution level. They contrast this achievement with the higher level of pollution whidh the industry would generate under a polluter subsidy whose payment is contingent upon participation in the polluting activity. Rose-Ackerman on the other hand has suggested that a Pigovian tax may induce firms to leave the industry when the damage they cause does not justify this action. The implication here is that the tax leads to an inefficiently small industry. This paper will attempt to show that either view may be correct, depending on the nature of the damage cost curves of the individual polluters. -from Author