The Existence and Uniqueness of Optimal Pollution Policy in the Presence of Victim Defense Measures

It is to be expected that rational people defend themselves against pollution externalities, at the very least through spatial separation from the source. But even in the simplest models, defensive behaviour generates nonconvexities, multiple optima, and inconclusive policy guidance. This raises serious questions for the theory of environmental policy, which have been largely ignored. This paper derives a sufficient condition for a uniquely optimal emissions level in the presence of defensive activity. The condition has an intuitive and (in principal) empirically testable interpretation. Two strategies for implementation are discussed: an iterative tax rule and a non-iterative demand-revealing mechanism.