On the multiplicity of efficiency-inducing tax rules

We derive corrective tax rules for a monopoly whose production processes generate emissions that add to a stock of pollution which evolves over time. In our model, the monopolist maximizes the discounted sum of its instantaneous profits, and the government designs a tax rule that corrects for both the externalities associated with pollution and the market power of the monopolist. We show that there exists a continuum of time-independent tax rules that guide the monopolist to achieve the socially optimum production path. (C) 2002 Elsevier Science B.V. All rights reserved.