Computing Pigouvian taxes for pollution abatement

The paper illustrates the computation of a pollution charge for a specific pollutant, sulphur dioxide. Sulphur dioxide is considered to be a major air pollutant. It is generated in the burning of crude fuels, especially coal and residuals of fuel refinement processes. The computed pollution charge is based on a Pigouvian tax scheme, which imposes a price for the damage caused by the use of the air as a sink for production wastes. The tax scheme is computed with the aid of a simple model of an economy of firms and households, combined with a spatial diffusion model which describes the spread of the pollutant over the inhabited region. We derive numerical estimates for such a tax, which can be easily adopted by a control agency. Morbidity and pollution data for Haifa, an industrial town in Northern Israel, with more than 50 factories located at, or close to the city, are used to illustrate and calculate the proposed tax scheme. The nature of the industry, especially in the absence of adequate control, causes air pollution of sulphur oxides, nitrogen oxides, particulates, ozone, etc. The major source of SO₂ pollution is a large power plant. In the application described in this paper, the tax is imposed only on electricity generation. However, this should suffice to reduce air pollution from SO₂ in the city and its vicinity to a considerable extent.