Instant Efficient Pollution Abatement Under Non-Linear Taxation and Asymmetric Information: The Differential Tax Revisited
Externalities,Pollution taxes,Coalition formation,Non-linear taxation,Asymmetric information,Co-operative game theory
Climate Change and Sustainable Development
This paper analyzes incentives for polluting firms to exchange abatement cost information under the non-linear pollution tax scheme (‘differential tax’) introduced by Kim and Chang [J. Regul. Econom. 5, 1993, 193-197]. It shows that polluting firms have – under mild conditions – an incentive to join a coalition whose members mutually truthfully exchange information as well as commit themselves with respect to their abatement decisions. As a result, the differential tax triggers instantly – i.e. no abatement adaptation is needed – efficient abatement levels without the regulator knowing marginal abatement costs. Consequently, this paper shows that differential taxation results in lower social costs than traditional non-linear taxation which triggers efficient emissions only after a period of non-efficient abatement.