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A Stochastic Optimal Control Model of Pollution Abatement

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  • D. Dragone
  • L. Lambertini
  • G. Leitmann
  • A. Palestini

Abstract

We model a dynamic monopoly with environmental externalities,investigating the adoption of a tax levied on the firm's instantaneous contribution to the accumulation of pollution. The latter process is subject to a shock, which is i.i.d. across instants. We prove the existence of an optimal tax rate such that the monopoly replicates the same steady state welfare level as under social planning. Yet, the corresponding output level, R&D investment for environmental friendly technologies and surplus distribution necessarily differ from the socially optimal ones.

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Bibliographic Info

Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 681.

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Date of creation: Nov 2009
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Handle: RePEc:bol:bodewp:681

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  1. Hassan Benchekroun & Ngo Van Long, 1997. "Efficiency Inducing Taxation for Polluting Oligopolists," CIRANO Working Papers 97s-21, CIRANO.
  2. Davide Dragone & Luca Lambertini & Arsen Palestini, 2009. "The Incentive to Invest in Environmental-Friendly Technologies: Dynamics Makes a Difference," Working Paper Series 21_09, The Rimini Centre for Economic Analysis, revised Jan 2009.
  3. Luca Lambertini, 2005. "Stackelberg leadership in a dynamic duopoly with stochastic capital accumulation," Journal of Evolutionary Economics, Springer, vol. 15(4), pages 443-465, October.
  4. Karp Larry & Livernois John, 1994. "Using Automatic Tax Changes to Control Pollution Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 38-48, July.
  5. Benchekroun, Hassan & Van Long, Ngo, 2002. "On the multiplicity of efficiency-inducing tax rules," Economics Letters, Elsevier, vol. 76(3), pages 331-336, August.
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Cited by:
  1. M. Fadaee, 2011. "A Dynamic Approach to the Environmental Effects of Trade Liberalization," Working Papers wp746, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Mehdi Fadaee & Luca Lambertini, 2012. "Non-Tradeable Pollution Permits as Green R&D Incentives," Working Paper Series 43_12, The Rimini Centre for Economic Analysis.
  3. M. Fadaee & L. Lambertini, 2011. "Using Auctions for Pollution Rights as Indirect Incentives for Investments in Green Technologies," Working Papers wp729, Dipartimento Scienze Economiche, Universita' di Bologna.

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