We consider the problem of regulating an economy with environmental pollution. We examine the distributional impact of the polluter-pays principle which requires that any agent compensates all other agents for the damages caused by his or her (pollution) emissions. With constant marginal damages we show that regulation via the polluter-pays principle leads to the unique welfare distribution that induces non-negative individual welfare change and renders each agent responsible for his or her pollution impact. We extend both the polluter-pays principle and this result to increasing marginal damages due to pollution. We also compare the polluter-pays principle with the Vickrey-Clark-Groves scheme.
Regulation; Polluter-Pays Principle; Fairness; Pollution; Externalities;
- C7: Game Theory and Bargaining Theory
- D02: Institutions: Design, Formation, and Operations
- D30: General
- D6: Welfare Economics
The Economic Journal, vol. 126, n. 593, June 2016, pp. 884–906