5.2. What noise-tax levels support the optima?
Since noise taxation and cumulative noise regulation are equivalent, it follows that the
above optima can be generated by suitable selection of the noise tax t. Consider first the
case where airlines make simultaneous choices. As seen above, when L is set at L∗ under
cumulative regulation, airline decisions yield the first-best optimum. But since any outcome
under cumulative regulation can be generated by an appropriate noise tax, it follows that a
particular value of the tax yields the first-best optimum.
To derive that value, observe that (23) and (24) jointly determine the solutions for f and L
under a particular level of the noise tax t. But this equation system has the same form as (28)
and (29), which determine the first-best optimum. The two systems can be made identical,
ensuring that the noise-tax solution coincides with the social optimum, when t is set at the
appropriate value, denoted t∗. As can be seen, the correct value is t∗ = λ, indicating that the
noise tax should be set equal to the marginal noise damage, a natural conclusion.
Suppose instead that airline choices are sequential, so that the second-best optimum is
relevant. To find the noise tax that generates this optimum, recall that the solution under noise
taxation is given by (15) along with the modified version of (24), which is written −f/L2+3t =
0. Thus, the equation determining L under noise taxation can be written −ˆf(L)/L2 +3t = 0.
For the resulting solution to coincide with the second-best optimum, t must be set at the value
ˆt
satisfying
−ˆf(ˆL)
ˆL
2
+ 3ˆt = 0. (33)
21
But since (32) must hold at L = ˆL, (33) can be used to eliminate the first term, allowing the
equation to be rewritten as
−3ˆt − θˆf
(ˆL) + 2λ = 0. (34)
Rearranging then yields
ˆt
=
2
3
λ − 1
3
θˆf
(ˆL) < λ ≡ t
∗
. (35)
(note that (32) implies positivity ofˆt). Thus, the noise tax rate that generates the second-best
optimum under cumulative regulation is less than the marginal noise damage and thus less
than t∗. Note that this conclusion might seem inconsistent with the inequality ˆL < L∗ from
Proposition 5 given that a low tax should be associated with a large, not a small, L. But since
this inverse relationship holds airline choice behavior fixed, whileˆt and t∗ apply under different
behaviors (simultaneous vs. sequential choice), no inconsistency arises.
It is important to recognize that, since noise taxation and cumulative noise regulation are
equivalent under sequential choice, and since ˆL is the best possible value of L, a tax rate
different fromˆt (one associated with a different value of L) cannot yield a higher welfare level.
Thus,ˆt is the welfare maximizing noise tax rate under sequential choice, and it is less than the
marginal noise damage λ. Summarizing yields