Political Lobbying, Individual Rationality, and Asymmetry of Taxes and Subsidies
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The effects of Piguvian taxes and subsidies on pollution control are compared for
an industry, with politically powerful producers. Only minimal structural and behavioral assumptions are adopted: profit maximization, the participation constraint, and that politicians are readily influenced. It is shown that the only surviving conclusions of the normative, politically free analysis are that taxes improve welfare in the short-run, whereas subsidies reduce it in the long-run. Otherwise, with political pressure, taxes and subsidies may be worse than a hands off, nonintervention policy. Also, in a political equilibrium, production is not efficient and costs are not minimized. The paper further shows that the preferred policy instrument cannot be determined on theoretical grounds; detailed knowledge of technical and behavioral parameters is required in order to find the best policy tool.