Land Development and Pigouvian Taxes: The Case of Peatland

In this paper the determination of an optimal Pigouvian tax for a competitive firm when a negative production externality is present concurrent with the development of land for production purposes is analyzed within a dynamic framework. Conditions are established for a convex social net return function where a Pigouvian tax is not required or where the imposition of a Pigouvian tax leads to the decision not to develop the land at all. In the case of a concave social net return function the Pigouvian tax is either a linear or a nonlinear tax on the private net returns.