Does compensative subsidy alleviate pollutant emission and improve welfare under cross-industry pollution?

This paper establishes a cross-industry pollution externality model under centralized labor union. In delineating the motivations of benevolent government, it might be possible to tax part welfare gains and use revenue compensate affected polluting industry for damage costs, thereby improving welfare. We show that magnitude marginal plays critical role. When is large, government should firm reduce pollution. However, when small, subsidize polluted increase output enhance consumer surplus.