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Sinn, Hans-Werner (1993): Pigou and Clarke join hands. In: Public Choice, Vol. 75, No. 1: pp. 79-91
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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 problem of finding the optimal quality of river water which serves both as a waste disposal and as a source of drinking water.