The Superiority of Pollution Taxes and Emission Standards : The Roles of Interest Groups and Transboundary Pollution

This paper is the first attempt to explore the impact of interest groups and transboundary pollution on the welfare effects of pollution taxes and pollution standards in the framework of strategic environmental policies. The main findings of this paper are as follows. First, without interest groups, regardless of the degree of transboundary pollution, the emission standards are welfare superior to pollution taxes. Second, with interest groups, when the lobbying efficiency is small enough or the degree of transboundary pollution is large enough, the social welfare of the emission standard is greater than that of the pollution tax. By contrast, when the degree of transboundary pollution is not large, and when the lobbying efficiency of the firm is large enough, the pollution tax is welfare superior to the emission standard. Consequently, the interaction between the lobbying efficiency and the degree of transboundary pollution plays an important role in the welfare comparison of pollution taxes and emission standards