OPTIMAL EMISSIONS TAXATION AND INTERNALIZATION OF ENVIRONMENTAL DAMAGE WHEN EMISSIONS OCCUR DURING USE OR AT DISPOSAL

Abstract

In a durable-goods oligopoly in which emissions may occur during use or at the disposal of the good, the comparison between the optimal emission tax in a period and marginal environmental damage in that period may not be relevant for environmental policy, as producers’ decisions depend on the expected total emission tax per unit produced in each period and the units of the good produced in one period may cause emissions and environmental damage in future periods. In this paper, through the study of optimal emission taxes, the total expected optimal emission tax per unit produced in a period is compared with the expected overall marginal environmental damage from the last unit produced in that period when the regulator can commit to future emission taxes and also when the regulator cannot commit to such taxes.