An input tax on nitrogen fertiliser pollution in the presence of transaction costs

Abstract

This paper proposes, for different water scarcity conditions, a cost efficient input tax policy to supply clean drinking water that is subject to contamination by nitrogen fertiliser and to quantify the welfare change due to this public control. By introducing a transaction cost component, we found that for moderate and relatively high water scarcity conditions the results support public intervention. However, for low scarcity conditions, our results indicate that welfare change is low or even negative, discouraging public intervention. We discuss a policy that supports the legal principle of the Polluter Pays Principle (PPP), by compensating the victim for the residual pollution not abated by the cost efficient solution, without affecting the efficiency criterion.