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The Timing of Environmental Policy: A Note on the Role of Product Differentiation

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Author Info
Poyago-Theotoky, Joanna
Teerasuwannajak, Khemarat

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Abstract

We examine the role that product differentiation can play in the design of environmental policy under full commitment and no commitment on the part of the environmental regulator. We consider a setting with two firms selling a differentiated product which generates pollution through emissions. Firms can reduce their emissions by undertaking abatement activities while an environmental regulator taxes emissions. The main results are: (1) When products are highly differentiated, the optimal time-consistent (no commitment) tax is always lower than the optimal pre-commitment tax. As the degree of product differentiation decreases, for relatively efficient abatement technology and high damages, the time-consistent emission tax exceeds the optimal pre-commitment one. (2) Abatement when product differentiation is extensive is higher under the time-consistent regime unless the abatement technology is extremely efficient. The same ranking applies to social welfare. However, as products become more and more similar, these results are (partially) reversed and pre-commitment could lead to both higher levels of abatement and welfare. Copyright 2002 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 21 (2002)
Issue (Month): 3 (May)
Pages: 305-16
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Handle: RePEc:kap:regeco:v:21:y:2002:i:3:p:305-16

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  1. Joanna Poyago-Theotoky, 2003. "Optimal environmental taxation, R&D subsidization and the role of market conduct," Discussion Paper Series, Department of Economics 0309, Department of Economics, University of St. Andrews. [Downloadable!]
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This page was last updated on 2008-8-7.

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