Environmental Taxes in Duopoly with Soft Capacity Constraints

Vetter Henrik ()
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Vetter Henrik: Statsbiblioteket, Victor Albecks Vej 1, 8000 Århus C, Denmark

The B.E. Journal of Economic Analysis & Policy, 2014, vol. 14, issue 4, 1569-1584

Abstract: This paper examines an environmental tax when duopolistic firms engage in capacity-price competition. Under soft capacity constraints, the equilibrium ranges from Bertrand competition to Cournot competition, depending upon parameters. It is shown that a unit tax potentially changes the qualitative nature of equilibrium. That is, the type of tax affects the mode of competition between firms. This effect gives rise to the result that a unit tax is sometimes an inefficient instrument. The explanation is that the tax that leads to the first-best under Cournot competition will in fact sustain Bertrand competition, and vice versa.

Keywords: environmental tax; duopoly; capacity choice; strategic interaction (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1515/bejeap-2013-0138

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