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Efficiency Inducing Taxation for Polluting Oligopolists

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  • Hassan Benchekroun
  • Ngo Van Long

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Abstract

We derive corrective tax rules when firms are oligopolists whose production processes generate emissions that add to a stock of pollution that accumulates over time. In our model, firms play dynamic Cournot games among themselves, and the government designs a tax rule that corrects for both the externality associated with emissions and the market power of oligopolists. We show that there exists a time-independent tax rule that guides the oligopolists to achieve the socially optimum production path. The optimal tax per unit of output is dependent on the current level of pollution stock, and it may be negative (implying a subsidy) when the pollution stock is low. We obtain a rather surprising result: in some cases, the optimal tax rule gives firms a subsidy for an initial time interval even though under laissez-faire their output exceeds the socially optimal output at each point of time. This subsidy, howerver, induces firms to produce less than they would under laissez-faire, because they know that if they produce more then the subsidy will be reduced in the future and/or will soon turn into a tax. Règle de taxation permettant de réaliser l'optimalité pour un oligopole polluant. On considère une industrie oligopolistique dans laquelle la production s'accompagne d'émissions de pollution qui s'accumule pour former un stock. Dans ce modèle, les firment se livrent une concurrence à la Cournot. Le gouvernement propose une règle de taxation pour corriger à la fois l'effet de la concurrence imparfaite et l'externalité négative due aux émissions de pollution. On montre qu'il existe une règle de taxation qui ne dépend pas explicitement du temps et qui amène les firmes à choisir le sentier de production socialement optimal. Le taux optimal de taxation d'unité de production dépend du niveau du stock de pollution et peut être négatif (une subvention) pour des niveaux faibles de stock de pollution. On obtient un résultat qui peut sembler surprenant à première vue : il peut être optimal de subventionner la production pour au moins une période de temps, même si la production de la situation de laisser-faire (sans intervention) est à chaque instant au-dessus du niveau de production socialement optimal. Malgré la subvention, les firmes réduisent leur production par rapport à la situation de laisser-faire afin de prolonger la période de subvention et retarder le moment où la subvention se transformerait en taxe.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 97s-21.

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Date of creation: 01 Apr 1997
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Handle: RePEc:cir:cirwor:97s-21

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Keywords: Pollution; oligopoly; taxation; incentive; dynamic games; Pollution; oligopole; taxation; incitation; jeux dynamiques;

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  3. GERARD Gaudet & PIERRE Lasserres & NGO VAN Long, 1996. "Dynamic Incentive Contracts With Uncorrelated Private Information And History-Dependent Outcomes," The Japanese Economic Review, Japanese Economic Association, vol. 47(4), pages 321-334, December.
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  7. Katsoulacos, Yannis & Xepapadeas, Anastasios, 1994. "Environmental Policy Under Oligopoly with Endogenous Market Structure," CEPR Discussion Papers 955, C.E.P.R. Discussion Papers.
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  13. Bergstrom, Theodore C. & Cross, John G. & Porter, Richard C., 1981. "Efficiency-inducing taxation for a monopolistically supplied depletable resource," Journal of Public Economics, Elsevier, vol. 15(1), pages 23-32, February.
  14. Newbery, David M G, 1990. "Acid Rain," CEPR Discussion Papers 442, C.E.P.R. Discussion Papers.
  15. Karp, Larry & Livernois, John, 1992. "On efficiency-inducing taxation for a non-renewable resource monopolist," Journal of Public Economics, Elsevier, vol. 49(2), pages 219-239, November.
  16. Morch von der Fehr, N-H., 1991. "Tradable Emission Rights and Strategic Interaction," Memorandum 11/1991, Oslo University, Department of Economics.
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  18. Livernois, J. & Karp, L., 1992. "Using Automatic Tax Changes to Control Pollution Emissions," Working Papers 1992-12, University of Guelph, Department of Economics and Finance.
  19. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
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  22. Gérard Gaudet & Pierre Lasserre & Ngo Van Long, 1999. "Real Investment Decisions Under Adjustment Costs and Asymmetric Information," Cahiers de recherche du Département des sciences économiques, UQAM 9908, Université du Québec à Montréal, Département des sciences économiques.
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