Impact of Pollution Control Policies in an Efficient Market With Full Recognition of Pollution

ABSTRACT In contrast to the general premise in the fields of economics, we consider an efficient market where pollution is fully recognized. That is, individuals recognize and internalize the impact of pollution generalized as a by‐product of production, where pollution flows are linked to outputs that lead to the accumulation of pollutants in the economy. As a result, a shadow price (a negative value) of the pollution stock emerges in the market economy, and accordingly, the level of pollution flow varies over time. Under this setup, we find that in the long run, a permanent pollution tax policy leads to a decline in both the pollution stock and its shadow price, whereas a temporary policy results in their increase. The numerical examples presented in this paper suppose these findings and confirm their quantitative significance. Finally, even when considering a society with only partial recognition of pollution, implying the presence of a pollution externality, we find that the above results still hold.