Emissions abatement R&D Dynamic Competition in Supply Schedules

Flavio Menezes and Jorge Pereira
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Jorge Pereira: School of Economics, The University of Queensland, https://economics.uq.edu.au

No 540, Discussion Papers Series from University of Queensland, School of Economics

Abstract: This paper investigates the optimal environmental policy (the mix of emissions tax and R&D subsidy) when two firms, producing differentiated products, compete in the output market over time. Firms compete over supply schedules, which encompasses a continuum of market structures from Bertrand to Cournot. While production generates environmentally damaging emissions, firms can undertake R&D, which has the sole purpose of reducing emissions. In addition to characterising the optimal policy, we examine how the optimal tax and subsidy and the optimal level of abatement change as competition intensifies, as the dynamic parameters change and as the investment in abatement technology changes. In this setting, increased competition no longer necessarily leads to an increase in welfare. Instead, there are two forces. Competition increases welfare through its impact on the final goods price. However, lower prices result in larger quantities and more pollution. Our contribution is to show that the impact depends on the extent of the market, and the nature of preferences and technology.

Keywords: Technology; R&D; Environment; Policy; Emission tax; Subsidy (search for similar items in EconPapers)
JEL-codes: H23 O32 O38 Q55 Q58 (search for similar items in EconPapers)
Date: 2015-04-14
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https://economics.uq.edu.au/files/46070/540.pdf (application/pdf)

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Journal Article: Emissions abatement R&D: Dynamic competition in supply schedules (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:qld:uq2004:540

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