Environmental Externalities, Abatement Behavior and Pigovian Taxes

Abstract

There has been much attention on the long-run effects of economic activities on the world environment. Although consumption is usually regarded as a measure of private benefit and enhances welfare, some of consumption may adversely affect the quality of environment, resulting in reducing welfare. In the analysis of environmental problems it is important to note that some dirty consumption may accumulate pollution, hurting environmental quality, while voluntary improvement of environmental quality could be employed. It is hence important to explore the implication of abatement behavior. The purpose of this paper is to investigate how the disexternality effects of polluting consumption will affect economic welfare and growth and then to investigate the normative role of Pigovian consumption taxes to internalize these effects.¹

An earlier version of the paper was presented at Washington State University and Warwick conference on “Theoretical Environmental Economies and Economics in Transition”, May 27–May 29, 1999. I wish to thank to Ray Batina, Leo Hurvitz, Peter Hammond, Thams Penstrom, and other seminar participants.

 As for the earlier literature, see Pigou (1920), Varian (1995), Bovenberg and de Mooij (1997) and Ihori (1999).