An additive tax and subsidy for controlling automobile pollution

Abstract

It is well known that a unit tax on the emissions of polluting firms and an equal unit subsidy for emissions abated are not symmetrical instruments. However, when no entry-exit conditions are at stake, as in the case of polluting households, the tax and subsidy are equivalent. Moreover, any combination of the two, summing to marginal pollution damage, is also efficient. This strong result is applied to the case of an economy in which each household owns an automobile. It also extends to the case in which some households rely on mass-transit or car-pooling, provided that such households also receive the subsidy.