Date of Submission


Date of Award


Institute Name (Publisher)

Indian Statistical Institute

Document Type

Doctoral Thesis

Degree Name

Doctor of Philosophy

Subject Name

Quantitative Economics


Planning Unit (PU-Delhi)


Gangopadhyay, Subhasis (PU-Delhi; ISI)

Abstract (Summary of the Work)

The Problem and Literature Review There is a growing concern for the environmental degradation caused by various economic activities. Clean environment, once regarded as a free good, has now become a scarce resource due to cumulative accumulation of pollution over the years. Being a public good, it may not be possible to assign clear property rights to environment. Hence, even though it has become a scarce resource, economic agents continue to regard it as a free good and tend to ignore the harmful effects of their activities on the environment. This causes a distortion between the market and socially optimal levels. In other words, a negative (environmental) externality is generated. Extensive work has been done to find measures to correct this distortion.Various measures suggested to correct for the negative externality caused by the generation of pollution can broadly be classified as: command and control (CAC) measures and market based (MB) measures. The various CAC measures are bans, prohibitions, quantity restrictions, emission standards, fines, penalties and threats of legal action against non- complying firms. Here the regulator specifies the requirements the firms have to comply with, failing which, they have to pay fines and penalties. The cost of compliance of these instruments is sometimes very high and, often, it is difficult to enforce them. Therefore, the focus has shifted to the use of MB instruments. They provide economic incentives to the firms to control pollution or adopt cleaner production technologies.The MB instruments include all forms of taxes/subsidies and tradeable permits. Even among the MB methods, the consensus has not been reached as to the appropriate environ- ment policy. However, emission taxes have emerged as one of the most important instrument in correcting environmental externalities. Apart from the efficiency criterion, there are vari- ous political economy issues related to the choice of instruments for environmental regulation. One such issue is, who should bear the cost of cleaning up the environment. Imposition of a tax on firms forces them to bear the cleanup cost, whereas provision of a subsidy may force the consumers to bear the cost of cleanup (depending upon how the subsidies are financed). A brief overview of the literature on corrective measures suggested for the environmental regulation is given below.Pigou (1920) suggested that a tax or a charge be imposed on the polluter, which is equal to the marginal social damage of pollution, or the (external) costs that are caused by the polluting activity. Such taxes are referred to as Pigouvian (emission) taxes. The tax internalizes the externality completely and under perfectly competitive market conditions, achieves Pareto optimality (Baumol and Oates, 1988). Emission taxes are consistent with the polluter pays principle. Under this principle, a polluter has the responsibility of cleaning the pollution.An alternative approach, which has been suggested in the literature. is the use of emission trading permits (Dales, 1968). Under this approach, permits, equivalent to the targeted level of emissions, are allocated to individual producers. This allocation may either be done in relation to an existing level of activity, referred to as grand fathering or, permits may be auctioned to the highest bidder.


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