Differentiated goods in a dynamic Cournot duopoly with emission charges on outputs

We extend the dynamic Cournot duopoly framework with emission charges on outputs by Mamada and Perrings (2020), which encompassed homogeneous products in its original formulation, to the more general case of differentiated goods, in order to highlight the richness in its static and dynamic outcomes. In the model each firm is taxed proportionally to its own emission only and charge functions are quadratic. Moreover, due to an adjustment capacity constraint, firms partially modify their output level toward the best response. Like it happened in Mamada and Perrings (2020), the only model steady state coincides with the Nash equilibrium. We find that the full efficacy of the environmental policy, which applies to an equilibrium that is globally asymptotically stable anytime it is admissible, is achieved in the case of independent goods, as well as with a low interdependence degree between goods in absolute value, independently of being substitutes or complements. On the other hand, when goods are substitutes and their interdependence degree is high, the considered environmental policy is still able to reduce pollution at the equilibrium, but the latter is stable just when the policy intensity degree is high enough. When instead goods are complements and their interdependence degree is high in absolute value, the considered environmental policy produces detrimental effects on the pollution level and the unique equilibrium is always unstable, when admissible. This highlights that, from a static viewpoint, even in the absence of free riding possibilities, the choice of the mechanism to implement has to be carefully pondered, according to the features of the considered economy.