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Environmental Policy to Foster a Green Differentiated Energy Market

Carlos Gutierrez-Hita () and Francisco Martínez-Sánchez ()

MPRA Paper from University Library of Munich, Germany

Abstract: Many products are made by technological processes that cause environmental damage. Current environmental concerns are affecting firms' technological processes as a result of government intervention in markets but also due to environmental awareness on the part of consumers. This paper assumes a spatial competition model where two firms sell a homogeneous product with input differentiation: the product is made by green and polluting inputs. In a two-stage game firms first decide what technology bundle to use (the ratio of green and polluting inputs) and then Bertrand competition takes place. First, it is shown that in the absence of government intervention both firms prefer to produce by using a bundle of green and polluting technologies which is not welfare maximizing. Second, the option of subsidizing green technology and the existence of a publicly-owned firm are analyzed. Overall, both policies yield a more environmentally-friendly technology bundle, except when costs of green energy technologies are high enough. Moreover, environmental social welfare is enhanced.

Keywords: Differentiated; inputs; ·; Environmental; policy; ·; Green; market; ·; Mixed; duopoly; ·; Subsidy (search for similar items in EconPapers)
JEL-codes: D11 D43 L11 (search for similar items in EconPapers)
Date: 2013-05-29
New Economics Papers: this item is included in nep-com, nep-ene, nep-env and nep-res
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