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

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  • Maia David
  • Bernard Sinclair-Desgagné

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.

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Bibliographic Info

Paper provided by INRA, Economie Publique in its series Working Papers with number 2006/04.

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Date of creation: 01 Aug 2006
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Handle: RePEc:apu:wpaper:2006/04

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Keywords: Environmental subsidies; Pigouvian taxes; Environment industry;

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  1. Maia David & Bernard Sinclair-Desgagné, 2005. "Environmental Regulation and the Eco-Industry," Journal of Regulatory Economics, Springer, vol. 28(2), pages 141-155, 09.
  2. Ian Parry, 1998. "A Second-Best Analysis of Environmental Subsidies," International Tax and Public Finance, Springer, vol. 5(2), pages 153-170, May.
  3. Bernard Sinclair-Desgagné & Alain-Désiré Nimubona, 2005. "The Pigouvian Tax Rule in the Presence of an Eco-Industry," Working Papers 2005.57, Fondazione Eni Enrico Mattei.
  4. Mads Greaker, 2004. "Industrial Competitiveness and Diffusion of New Pollution Abatement Technology – a new look at the Porter-hypothesis," Discussion Papers 371, Research Department of Statistics Norway.
  5. Fredriksson, Per G., 1998. "Environmental policy choice: Pollution abatement subsidies," Resource and Energy Economics, Elsevier, vol. 20(1), pages 51-63, March.
  6. Conrad Klaus, 1993. "Taxes and Subsidies for Pollution-Intensive Industries as Trade Policy," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 121-135, September.
  7. Lerner, Abba P, 1972. "Pollution Abatement Subsidies," American Economic Review, American Economic Association, vol. 62(5), pages 1009-10, December.
  8. Joan Canton & Antoine Soubeyran & Hubert Stahn, 2008. "Environmental Taxation and Vertical Cournot Oligopolies: How Eco-industries Matter," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 40(3), pages 369-382, July.
  9. Don Fullerton & Robert D. Mohr, 2002. "Suggested Subsidies are Sub-optimal Unless Combined with an Output Tax," NBER Working Papers 8723, National Bureau of Economic Research, Inc.
  10. Stranlund, John K., 1997. "Public Technological Aid to Support Compliance to Environmental Standards," Journal of Environmental Economics and Management, Elsevier, vol. 34(3), pages 228-239, November.
  11. Eberhard Feess & Gerd Muehlheusser, 2002. "Strategic Environmental Policy, Clean Technologies and the Learning Curve," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 23(2), pages 149-166, October.
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