Comment on ‘An effluent charge schedule: Cost, financial burden, and punitive effects’ by E. Downey Brill, Jr., Charles S. ReVelle, and Jon C. Liebman

In the Pigouvian tradition the proper level of a tax upon the generation of an externality is equal to the marginal net damage produced by that activity, where net damage is defined as the difference between marginal social and private damage [Baumol and Oates, 1971]. In this way, whenever the benefits to society of a reduction in an emission exceed the costs of this reduction, the polluting firm will realize a net saving by cutting back on its effluents rather than paying a charge on them. In contrast, when a reduction in emissions is not worth its cost to society, it will also be unprofitable for the polluter. The difficulty of estimating the benefits of pollution abatement and the even greater difficulty of calculating marginal net benefits have led many economists to abandon their quest for 'ideal' fees [Mills, 1975; Baumol and Oates, 1979]. As a substitute, they suggest that environmental authorities formulate a set of quality goals and then determine by empirical analysis and experimentation the taxes necessary to achieve these goals. Baumol and Oates [1979] label these taxes as 'second best' substitutes to ideal fees when they achieve the same effect as the cost minimizing solution obtained by a central planner. In an earlier paper [Baumol and Oates, 1971] they show that constant unit taxes possess econd best properties provided that they are equal to the shadow price of the pollution constraint. They do not, however, derive the general second best conditions. These will be presented in the following section and will be compared to the tax schedule proposed by Brill et al. [1979].