Akinori Kumagai

Department of Economics, Aoyama University
(4-4-25, Shibuya, Shibuya-ku, Tokyo 150 Japan)

Abstract

Economists see environmental pollution as an externality problem. At first, Pigou proposed a tax as a suitable means of equating private and social cost. An optimal Pigovian tax is equal to the marginal external cost at the optimal level of pollution. The theoretically correct Pigovian tax approach may well be effective, but impractical. Then Baumol-Oates presented a proposal for a feasible tax program: the use of a pollution tax to achieve a predetermined set of standards for environmental quality. That is, there is no attempt to reach the true social optimum. This proposal can be shown to offer some significant optimality properties. According to Coase, the most efficient solution to pollution damage situations is a bargaining process between polluter and sufferer. Regardless of who holds the property rights, there is an automatic tendency to approach the social optimum. But, despite its elegance, there are many problems with the Coase theorem. We analyze alternative pricing instruments for the attainment of any predetermined environmental standards: a system of marketable permits. A properly designed permit system possesses the least-cost property and can achieve standards at minimum social cost. Therefore, it may represent a more attractive approach to the introduction of pricing measures for enviromental protection.

Key words: external diseconomies, Pigovian tax, Baumol-Oates theorem, Coase theorem, Marketable permits.