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In this paper we investigate trade union formation. To this end we apply a model with two types of labour where the interests of both groups of labourers are represented by either a joint (industry) labour union or by two independent group-specific (professional) labour unions. We investigate whether, and if so, under which conditions, it is beneficial for at least one group of labourers to form its own independent union; or whether it is in the interest of both groups to have a joint industry labour union. Applying the (asymmetric) Nash bargaining solution, we find that under reasonable conditions, it is beneficial for at least one group of labourers to form its own independent labour union. In this case a joint union must be considered as an unstable institution. The profit share, however, is always higher if the firm bargains with a joint labour union. This explains why employers vehemently oppose recent split offs of specialized labour groups from existing industry unions and from tariff unions.

The author argues that a government taxing a polluting monopoly by means of levies on output and inputs can implement the first‐best allocation through a continuum of tax profiles. Using this degree of freedom in the tax system, the government is, in general, able to transfer income from the firm to the public sector, so that the additional tax rate acts as a non‐distorting tax on profits. This transfer – and therefore public revenue – is the higher, the lower (higher) the input taxes are, and correspondingly the higher (lower) the output tax is, provided that the production function exhibits decreasing (increasing) returns to scale.