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Environmental policies in the presence of more than one externality and of strategic firms

Nahid Masoudi ()

Journal of Environmental Planning and Management, 2022, vol. 65, issue 1, 168-185

Abstract: We first study the optimality of a committed policy mix of tax and subsidy to control pollution when firms are involved in abatement technology R&D that is subject to knowledge spillovers. Then a comparison of tax and subsidy is provided when the policy mix is not available and the regulator can use only one single policy. Two different behavioral assumptions for the firms are examined: when firms are myopic, and when they are strategic, i.e. react to the ex-ante committed policies strategically. The results suggest that using a policy mix the committed regulator can attain optimality if firms are myopic, however, a strategic reaction from the firms may compromise the efficiency of the policy mix. We also show that when the policy mix is not available to the regulator and they have to commit to only one single policy, then tax policy may have some advantages over subsidy. Moreover, our results suggest that unlike the policy mix, the single policy is more effective in the case of strategic firms rather than myopic ones.

Date: 2022
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DOI: 10.1080/09640568.2021.1880380

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