Abstract

This paper develops a simple, incentive compatible, allocation mechanism by means of which both polluters and pollutees will reveal their preferences so that the government can deter­mine the Pareto optimal pollution level. The mechanism involves a combination of the Pigou tax and the Clarke tax. The two taxes are complementary and together provide a practical solution to the environment problem. The mechanism is applied to the prob!em of finding the optimal quality of river water which serves both as a waste disposal and as a source of drinking water.