ABSTRACT
This chapter provides a framework to compare alternative policies. The term "incentive instruments" includes both the Pigouvian tax and the subsidy to abatement, and it includes various policies that involve permits such as traded by electric utilities under the Clean Air Act Amendments of 1990. A simple analytical model is used to demonstrate conditions under which the Pigouvian tax is equivalent to a government sale of permits. The Pigouvian subsidy might be equally pointless if it costs revenue that must be covered by raising any existing tax. The chapter discusses economic efficiency in terms of the optimal amount of pollution. Economic efficiency is just one of many criteria for the evaluation of government policy options. If the marginal cost of abatement curve is steeper than the marginal cost of pollution, then the government should set the price and leave the quantity uncertain. Actual U. S. environmental policies do not use taxes to discourage pollution.
