The economics of enforcing pollution taxation

The efficient structure of pollution tax policy is examined when it is recognized that enforcing compliance will be costly. There are two components of this cost: (1) the direct cost of enforcement and (2) the cost polluters incur avoiding enforcement. Considering only the first cost, the efficient pollution policy calls for a tax in excess of that conventionally recommended as efficient, T¹ but with little enforcement. Once avoidance cost is recognized the efficient policy can be substantially altered; requiring a tax lower than T¹, but with greater enforcement. Even when direct enforcement cost is zero, it is shown that there is no unique advantage to T¹ in the absence of avoidance cost.