Optimal environmental taxation, R&D subsidization and the role of market contract

Optimal environmental taxation, R&D subsidization and the role of market contract

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Article ID: iaor2005610
Country: Finland
Volume: 16
Issue: 1
Start Page Number: 15
End Page Number: 26
Publication Date: Jan 2003
Journal: Finnish Economic Papers
Authors:
Keywords: taxation
Abstract:

The paper examines the optimal environmental policy in a differentiated goods duopoly with either price- or quantity-setting firms, where firms invest in environmental R&D that reduces emissions. It is shown that in quantity (Cournot) competition, the emission tax is always lower than marginal damages. With price (Bertrand) competition, the emission tax is generally lower than marginal damages. However, for the case of very undifferentiated products, the emission tax is equal to marginal damages, that is, it approaches the first-best tax. Concerning the R&D subsidy, the comparison crucially depends on the degree of product differentiation and the initial emissions coefficient.

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