Environmental policies frequently target the ratio of dirty to green output within the same industry. To achieve such targets the green sector may be subsidised or the dirty sector be taxed. This paper shows that in a monopolistic competition setting the two policy instruments have different welfare effects. For a strong green policy (a severe reduction of the dirty sector) a tax is the dominant instrument. For moderate policy targets, a subsidy will be superior (inferior) if the initial situation features a large (small) share of dirty output. These findings have implications for policies such as the Californian Zero Emission Bill or the EU Action Plan for Renewable Energy Sources.
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number
341.
Length: 18 p. Date of creation: 2003 Date of revision: Publication status: Published in: Journal of Regulatory Economics 27 (2005), 2, 177-202 Handle: RePEc:diw:diwwpp:dp341
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