This paper integrates all eight of these solutions into a single model that shows when they are equivalent, when they differ, and how they differ. The starting point for the analysis is a simple model with no administrative cost, no enforcement problems, competitive firms, and perfect certainty. All have the same effects on pollution and the same collection of revenue. The paper then considers more complicated circumstances, in order to help policymakers choose among these policies. With uncertainty, for example, taxes and permits are no longer equivalent.
Taxes have a certain cost to the firm but uncertain effect on abatement.
On the other hand, permits require a certain level of abatement but unknown level of cost. Clearly some of these policies will be more feasible to enact, less costly to administer, or easier to enforce. The policy needs to be coordinated with other goals of environmental protection, antitrust enforcement, and international competitiveness. The paper suggests that environmental tax shifts can be constructed which would protect disadvantaged groups, help those who lose their jobs, help create new jobs, and even renew urban areas by promoting the development of brownfields in cities. About the author Don Fullerton is Addison Baker Duncan Centennial Professor of Economics at the University of Texas at Austin.