Nonpoint source groundwater pollution and endogenous regulatory policies

[1] Theory suggests that in the absence of transaction costs, pollution externalities can be mitigated efficiently by charging polluters a tax equal to the marginal social cost of pollution. All other regulatory mechanisms therefore may be no more efficient than a marginal cost pollution tax. We developed a stylized model of dynamic groundwater pollution without transaction costs to examine alternate policies. Using mitigation cost, tax burden, and excess burden we compared the relative efficiency of each tax policy under competitive market conditions. For groundwater nitrate pollution in a Midwestern farming region, results show that the least cost policy is a constant tax on the polluting input, followed by a variable tax on the polluting input and a pollution tax.