Taxes versus quotas in lobbying by a polluting industry with private information on abatement costs

• Private information might improve social welfare under tax.
• Private information does not improve social welfare under quota.
• Quota is generally socially preferred over tax.
• Private information reduces the comparative disadvantage of tax compared to quota.

We present a model of lobbying by a polluting industry with private information on pollution abatement costs and compare taxes with quotas under such conditions. We also examine the effect of private information on lobbying activity and social welfare under these two instruments. It is found that private information might improve social welfare under taxes when the government has little concern for social welfare, whereas private information does not improve social welfare under quotas. Quotas are generally socially preferred when the slope of marginal abatement costs is steeper than that of marginal damage or when the government does not concern itself with social welfare. However, private information reduces the comparative disadvantage of taxes compared to quotas when the government has little concern for social welfare. Finally, the results of numerical examples suggest that quotas are employed rather than taxes if the difference in natural emission levels between high- and low-cost industries is large.