The charges approach to the environmental policy in an economy with homogeneous jurisdictions

This paper investigates properties of an environmental policy based on the concept of a Lindahl equilibrium. Such a policy results in a system of ‘effluent’ charges, if the economy is composed of homogeneous jurisdictions, each inhabited by a continuum of households. The supply of the environmental commodities in the jurisdictions generates spillovers, and consumption of the environmental commodities is subject to congestion. In such an economy, the set of equal treatment Lindahl equilibria coincides with the core, if congestion effects exhibit ‘constant returns to group size’ locally in each jurisdiction. This is insofar important, since the federal government typically has the possibility to modify spillover effects and congestion effects by appropriate environmental regulations. Thus, there are policy implications which go beyond the recommendation of environmental policy instruments, and which also affect the design of an economically sound system of effluent charges.