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Pollution abatement subsidies and the eco-industry

Maia David and Bernard Sinclair-Desgagné

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Abstract: This paper considers the combination of pollution taxes and abatement subsidies when some polluting firms procure their abatement goods and services from an oligopolistic eco-industry. The regulator must here cope with two simultaneous price distortions: one that comes from pollution and the other which is caused by the eco-industry's market power. In this context, we show that taxing emissions while subsidizing polluters' abatement efforts cannot lead to first-best, but the opposite occurs provided it is the eco-industry's output which is subsidized. When public transfers also create distortions, welfare can be higher if the regulator uses only an emission tax, but subsidizing abatement suppliers while taxing emissions remains optimal when the eco-industry is concentrated.

Keywords: INDUSTRIE; POLLUTION ABATEMENT SUBSIDIES; PIGOUVIAN TAXES; ENVIRONMENT GOODS AND SERVICES INDUSTRY; COMBINAISON D'INSTRUMENTS; SUBVENTION ENVIRONNEMENTALE; ECO-INDUSTRIE (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01172938
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Published in Environmental and Resource Economics, Springer, 2010, 45 (2), pp.271-282. ⟨10.1007/s10640-009-9315-3⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01172938

DOI: 10.1007/s10640-009-9315-3

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