PRICES, POLITICS AND PERSUASION: THE CASE OF POLLUTION CONTROL AND CLEAN TECHNOLOGY ADOPTION

Abstract

This paper presents three simple models to study how prices, politics and persuasion may each play a role in environmental policy-making. Our conclusions are twofold. First, in the absence of increasing returns, requiring the polluting industry to purchase pollution permits can internalize the negative externality of pollution, and the optimal price of pollution permits should increase with the disutility of pollution. Second, with increasing returns in the industry using clean technologies, it is welfare enhancing to complement the pollution permits policy with a tax-funded subsidy to the clean industry, or with a tax-funded public campaign to persuade consumers to move away from pollution-generating goods.