Implementing the efficient allocation of a persistent pollutant in the presence of threshold effects

The regulation of a persistent pollutant through a sequence of compensation mechanisms [Varian, H., 1994, A solution to the problem of externalities when agents are well-informed, American Economic Review 85, 1278–1293] involves the unexpected conclusion that it may be optimal to establish lower taxes in response to an increase in the magnitude of a (possible) catastrophe.