The Gains from Differentiated Policies to Control Stock Pollution When Producers are Heterogeneous

We derive optimal input taxes to control stock pollution problems generated by heterogeneous agents. The taxes vary over time and in response to differences of asset quality and technology choice. We also derive second-best policies and compare them to the efficient policy and also among themselves. Different policies will affect the timing for when, and the extent to which, conservation technologies are adopted. A numerical example, based on the California drainage problem, shows significant efficiency gains from the optimal policy compared to no intervention, but much of the gains are lost with second-best interventions. The gains from optimal policies do not always increase with the degree of heterogeneity. Copyright 2008, Oxford University Press.

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