Optimal charges on river effluent from lumped and distributed sources

We propose a modelling framework for the design of a Pigouvian effluent tax, in an environmental management problem implicating several economic agents located in a river basin. The proposed charging system allows for the agents' geographical position relative to the river's sections, at which environmental standards are to be enforced, and takes into account the possible different market structures within which the agents are operating. In particular, we consider industrial agents competing on an oligopolistic market, and a set of farmers acting as price takers on a large market. A regional authority's goal is to induce agents to some sort of cooperation which would result in the satisfaction of the common environmental constraints. The economic process on one side, and the pollution transport and accumulation on the other, constitute two dynamic processes in two different time scales. As the economic process is much slower than the other process we can neglect the latter's transients and concentrate on the time invariant steady state solutions to the transportation equation. The model thus constructed has some noncooperative game and optimal control problem's features with space being the ‘running’ variable. This revised version was published online in July 2006 with corrections to the Cover Date.