Weighted location differential tax in environmental problems

Abstract

Based on Pigou’s view, environmental taxation increases the cost of polluting activities reflecting the true social cost imposed on societies by the environmental damage caused by these activities. Imposing an emissions tax is a standard way to internalize the external pollution damages into producers’ decision-making. An efficient outcome is attained, when marginal external cost of emissions is identical for all producers and equal to marginal abatement cost of each producer. When producers are heterogeneous, however, a uniform emission charge usually fails to satisfy these requirements. In this case, ideally, taxes should be differentiated across pollution sources to consider variations in the marginal damage caused by their respective activities. In this paper, the total pollution cost is related with contaminated locations and a weighted-location-differentiated tax together with a corresponding index that adjusts taxation to the damages caused, is proposed. The weights follow a gamma-order normal distribution, which is described by shape, location and scale parameters, allowing for some flexibility in the measure of spatially differentiated environmental impacts. © 2016, Society for Environmental Economics and Policy Studies and Springer Japan.