On the Polluter-Pays Principle

We consider the problem of regulating an economy with environmental pollution. A regulation mechanism defines payments contingent on pollution emissions. The polluterpays mechanism requires that any agent compensates all other agents for the damages causes by his or her own emissions. It is the budget-balanced and efficient. It implements the unique welfare distribution that assigns non-negative individual welfare and renders each agent responsible for his or her pollution impact. Next we examine its acceptability by agents. A mechanism is acceptable if no group of agents can be made better-off with another mechanism. The polluter-pays principle might not be acceptable. It is acceptable if pollution externalities are multilateral among homogenous agents. Last, we posit a more general mechanism that implements the polluter-pays welfare distribution under asymmetric information on pollution emissions and damages. ∗Toulouse School of Economics (INRA-LERNA-IDEI), France [email protected] †Département de Sciences Économiques and CIREQ, Université de Montréal, Canada, [email protected]