ABSTRACT
Economists often view environmental charges as the most expected instrument for environmental and natural resources policy and tend to use them as a point of reference for other instruments. A pure environmental charge is referred to as a Pigovian tax if it is set equal to marginal social damage (e.g., of some pollution) (see Box 8-1). At least under several classical assumptions (including fully informed, honest, welfare-maximizing regulators and appropriate concepts of property rights), they have certain optimality properties. However, in many cases, the pure environmental tax is hard to use (e.g., if pollution is unobservable) and the available proxies or substitutes (such as input or output taxes) are more or less suitable.
