Strategic pigouvian taxation, stock externalities and polluting non-renewable resources

Abstract

This paper uses Wirl’s [Wirl, F., 1995. The exploitation of fossil fuel under the threat of global warming and carbon taxes: A dynamic game approach. Environmental and Resource Economics, 5, 333–352.] model designed to analyze the long-term bilateral interdependence between a resource-exporting cartel and a coalition of resource-importing country governments for investigating under what conditions a carbon tax would make it possible for the coalition to appropriate part of the cartel’s profits. The results show that the tax defined by the Markov-perfect Nash equilibrium is a neutral pigouvian tax — in the sense that it corrects only the market inefficiency caused by the stock externality. However, if the coalition acts as a Stackelberg leader, the strategic pigouvian taxation allows importing countries to capture part of the cartel’s profits. This transfer is the result of an initially lower producer price in comparison with the value corresponding to the Nash equilibrium. The strategic advantage of the importing country governments reduces the discounted present value of the Marshallian aggregate surplus.