This paper develops a simple model of the automobile market, in which significant network and environmental externalities are present, and examines consumers' choice of technology. There are two types of technology: one that currently dominates the market but imposes significant environmental costs, and one that is expected to be introduced and has zero environmental costs. We find that, in the absence of policy intervention, the benefits of the installed base and the price diferentials in favour of the existing technology will deter new users from adopting the clean technology. We consider diferent tax policies that will induce adoption provided it is welfare warranted. First, we analyze a tax policy on the dirty technology with the tax revenues generated being used for general purposes.Under this case, we find that the tax, to induce adoption, will be greater than the marginal environmental damage. Second, we consider the tax revenue generated from the dirty technology to be earmarked towards a future subsidy to the clean technology. In this case, the tax is found to be lower than the case where revenues are used for general purposes and more interesting is the fact that the tax can be set equal to the marginal damage. Finally, we examine the case where the government credibly commits a revenue neutral tax/subsidy policy prior to the introduction of the clean technology and we find that the tax and the subsidy expenditures required could be lower relative to the case without precommitment.
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