Feed-in Subsidies, Taxation, and Inefficient Entry

Fabio Antoniou and Roland Strausz

Environmental & Resource Economics, 2017, vol. 67, issue 4, No 13, 925-940

Abstract: Abstract We study (energy) markets with dirty production and lumpy entry costs of clean production (renewables). For intermediate entry costs, markets yield inefficient production and inefficient entry. A mix of three popular regulatory instruments—polluter taxation, feed-in subsidies for renewables, and consumption taxation—cannot correct these market failures for larger entry costs. The instruments are imperfect because they affect marginal incentives, whereas entry is a lumpy fixed cost problem. Whenever the first best is implementable, feed-in subsidies and consumption taxes are redundant. The second best requires feed-in subsidies or consumption taxes in addition to a pollution tax and overshoots first best levels. Given production levels, the instruments do not affect the regulator’s budget.

Keywords: Taxation; Feed-in tariffs; Externalities; Renewables; Entry; Pollution (search for similar items in EconPapers)
JEL-codes: D21 D61 H23 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (20)

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DOI: 10.1007/s10640-016-0012-8

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