Environmental Policy in a Linear City Model of Product Differentiation

Ana Espinola-Arredondo and Huan Zhao ()
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Huan Zhao: School of Economic Sciences, Washington State University

No 2011-4, Working Papers from School of Economic Sciences, Washington State University

Abstract: This paper analyzes how a tax/subsidy policy affects consumers? behavior when choosing between green (pollution free goods) and conventional products and its effects on welfare when some consumers have strong preferences for green goods. We develop a three stage complete information game, using the Hotelling?s linear city model. We show that when products are identical in all respects except in their environmental properties, a tax/subsidy policy performs better than the case without policy. Our efficiency comparisons suggest that under a setting of horizontal product differentiation a tax/subsidy (either on consumers or polluting ?firms) produces higher social welfare than the absence of policy. Moreover, the proportion of consumers who prefer green products affects the welfare gains from a subsidy or tax policy.

Keywords: Green products; environmental policy; horizontal product differentiation (search for similar items in EconPapers)
JEL-codes: H23 L5 Q58 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2011-05
New Economics Papers: this item is included in nep-env and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Environmental policy in a linear city model of product differentiation (2012)
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