Environmental Policies in a Polluting Duopoly: A Simple Comparison

Domenico Buccella (), Luciano Fanti () and Luca Gori ()
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Domenico Buccella: Kozminski University
Luciano Fanti: University of Pisa

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2025, vol. 11, issue 3, No 18, 1387-1412

Abstract: Abstract In a polluting Cournot duopoly with homogeneous goods, this work compares the environmental, public finance and welfare impacts of three policies: an emissions tax, an abatement subsidy, and a policy mix. A subsidy, alone or coupled with a tax, always increases abatement; however, taxation disincentivises production, leading to decreased environmental damage, which positively affects welfare. Except for a rather inefficient technology, the emissions tax produces the lowest environmental damage; this positive effect, jointly with the tax revenues the government collects, more than offsets the negative impact on profits and consumer surplus due to output contraction, leading to the highest welfare. Only when societal awareness is negligible and technology is inefficient does the government design a policy providing a subsidy.

Keywords: Abatement subsidy; Emissions tax; Cournot duopoly; Social welfare (search for similar items in EconPapers)
JEL-codes: H23 L1 M5 Q58 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s40797-024-00277-3

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