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Revisiting the Environmental Subsidy in the Presence of an Eco-Industry

Maia David and Bernard Sinclair-Desgagné

No 2006/04, Working Papers from INRA, Economie Publique

Abstract: This paper re-considers environmental subsidies in the context where polluting firms procure their abatement goods and services from a specialized oligopoly. In order to maximize social welfare, a regulator must then simultaneously alleviate two distortions: one that comes from pollution and the other that is due to the environment firms' market power. We find that the combination of an emission tax and a subsidy to polluters cannot achieve the first-best, while the opposite positive conclusion obtains if the subsidy is granted instead to environment firms. When public transfers are themselves subject to distortions, however, welfare may be higher if only an emission tax is used.

Keywords: Environmental subsidies; Pigouvian taxes; Environment industry (search for similar items in EconPapers)
JEL-codes: H23 L13 Q58 (search for similar items in EconPapers)
Date: 2006-08-01
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Working Paper: Revisiting the environmental subsidy in the presence of an eco-industry (2007) Downloads
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