Efficiency without Optimality: A Pragmatic Compromise for Environmental Policies in the Late 1960s

In the late 1960s, new environmental policies emerged which attempted to reach predetermined pollution standards in a cost-effective way: i.e., the ‘standard-and-tax’ approach proposed by William J. Baumol and Wallace E. Oates and the permits market approach proposed by John Dales. This paper describes the early history of the two approaches, and compares them. Although they flow from different traditions, namely Pigovian versus Coasean, and are often contrasted in the literature, these cost-effective solutions emerged at the same time and for the same reasons. First, they both tried to promote incentives-based policies against traditional regulations; second, they criticized the optimal Pigovian tax, which raised the contentious issue of measuring pollution damage. More broadly, they emerged as a kind of pragmatic compromise, fed by a common attempt to move toward more practical policies: reaching efficiency without optimality, while relying on standards whose setting is a matter for political decision.

Economic Ecology

The approach to economic ecology is based on a survey of the state of the ecosystem that departs from the state of global warming as summarized by the Intergovernmental Panel on Climate Change (IPCC). The state of alternatives to fossil energy is reviewed, too. Review of measures to establish a circular economy forms the base of a strategy for transition to carbon neutral economy. The most effective economic intervention towards global heating is identified as a Pigovian Tax on CO2-emission (ET). Evidence on the effectiveness and the state of implementation of ET 2020 is reviewed. For complementary evidence, the ET-calculation model of the Danish Climate Law 2020 is described by representatives of the Danish Climate Council in Appendix by Bendtsen and Stewart.

Strategic environmental policy and international market share rivalry under differentiated Bertrand oligopoly

We analyse strategic environmental policies under international Bertrand oligopoly when firms in different industries, located in different countries, produce differentiated products. Under cooperation, emission prices always exceed the joint marginal damage from pollution. Under non-cooperation, internationally nontradable and tradable emission permit prices are always higher than the domestic marginal damage from emissions (the Pigovian tax); emission taxes can also exceed the Pigovian tax. The non-cooperative emission prices under all instruments can exceed the joint pollution damage. Internationally tradable permits generate outcomes closest to cooperation — they result in the lowest pollution and the highest welfare among all instruments under non-cooperation. Pollution is the highest and welfare the lowest with taxes. Our results provide support for allowing international trade in emission permits even when governments choose their permit levels non-cooperatively.

EFFICIENCY WITHOUT OPTIMALITY: ENVIRONMENTAL POLICIES AND POLLUTION PRICING IN THE LATE 1960S

In the late 1960s, new environmental policies emerged that attempted to reach predetermined pollution standards in a cost-effective way: i.e., the “standard-and-tax” approach proposed by William J. Baumol and Wallace E. Oates, and the permits market approach proposed by John Dales. This paper describes the early history of the two approaches, and compares them. Although today they refer to different traditions, namely Pigovian versus Coasean, and are often contrasted in the literature, these cost-effective solutions emerged at the same time and for the same reasons. First, they both tried to promote incentives-based policies against traditional regulations; second, they criticized the optimal Pigovian tax, which raised the contentious issue of measuring pollution damage. More broadly, they emerged as a kind of pragmatic compromise, fed by a common attempt to move toward more practical policies: reaching efficiency without optimality, while relying on standards whose setting is a matter for political decision.

The Pigovian tax on capital-intensive industries

Government intervention in the market and industrial policy tend not to be considered good. However, as can be seen from the Cobb-Douglas production function, capital has the effect of increasing the marginal productivity of labor, and the effect is greater in industries with high labor share (labor-intensive industries). For this reason, if a Pigovian tax is imposed on capital-intensive industries, some capital will move to labor-intensive industries and workers' wages will increase. This paper uses a two-sector model to analyze the optimal Pigovian tax rate that will maximize the income of workers. It shows that the optimal Pigovian tax rate is higher in countries with higher productivity in capital-intensive industries and have more capital and less population.

Illustrating the Difference Between a Pigovian Tax and Emissions Fee Using Isoquant and Isocost Geometry

The study of environmental economics is motivated by the idea that pollution constitutes a negative externality. When production costs do not include the harm to human health and the environment, the market price is too low and output levels are too high, relative to the efficient levels. The initial solution to this problem is usually the “the Pigovian tax” on production. However, all subsequent tax analysis focuses directly on emissions. This tends to leave students wondering (a) why discuss Pigou in the first place and (b) why is it better to focus on pollution emissions rather than production. I provide a graphical analysis, using isoquant and isocost geometry, to illustrate that a direct fee on the externality-generating input is more efficient than a tax on output. This analysis is something teachers might consider utilizing to clarify why there is a transition from output taxation to input taxation. JEL Classifications: A22, A23, Q50

The Theory of Share Tenancy and the Old “Good Economics”

What The Theory of Share Tenancy did to share tenancy repeats what Coase did to Pigovian tax. The Theory of Share Tenancy pioneered the empirical study of transaction costs and property rights.