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Optimal Environmental Taxation, R&D Subsidization and the Role of Market Conduct

Joanna Poyago-Thotoky
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Joanna Poyago-Thotoky: Department of Economics, University of St Andrews, United Kingdom

Authors registered in the RePEc Author Service: Joanna Poyago-Theotoky

Finnish Economic Papers, 2003, vol. 16, issue 1, 15-26

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. Moreover, the Cournot emission tax is always lower than the Bertand emission tax. Concerning the R&D subsidy, the comparison crucially depends on the degree of product differentiation and the initial emissions coefficient.

JEL-codes: H29 L13 O38 Q28 (search for similar items in EconPapers)
Date: 2003
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Handle: RePEc:fep:journl:v:16:y:2003:i:1:p:15-26