Rent-Seeking with Pollution Taxation: An Extension

In a recent issue of this Journal, Dwight Lee analyzes pollution taxation in a rent-seeking environment. The purpose of this paper is to extend Lee's basic framework to a second-best environment. In doing so it will be shown that a Pigovian tax may be the preferred rate even if rent-seeking costs are included. The paper is organized as follows. In section II we present a slightly modified version of Lee's analysis of the optimal pollution tax in a rent-seeking environment. Having done so, it is shown that Lee's specification of the optimal pollution tax must be modified in a second-best environment. Some general results that emerge from our analysis are summarized in a proposition. In section III we offer some concluding remarks. -from Authors