I examine a policy-making game among countries that must choose both a policy instrument (e.g., a tax or a quota) and its intensity (i.e., the tax rate or the quota level) to price pollution. When countries price pollution non-cooperatively, they not only set the intensity inefficiently, they...

Pigou's conjecture was that under costly taxation public expenditures should not reach the point where marginal benefits equal marginal costs. In the treatment here, public expenditures (and environmental protection) may provide public goods for consumption but also collective inputs for...