Davide Dragone () ( Department of Economics, University of Bologna) Luca Lambertini () ( Department of Economics, University of Bologna; ENCORE, University of Amsterdam; RCEA) Arsen Palestini () ( Department of Economics, University of Bologna)
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The established view on oligopolistic competition with environmental externalities has it that, since firms neglect the external effect, their incentive to invest in R&D for pollution abatement is nil unless they are subject to some form of environmental taxation. We take a dynamic approach to this issue, using a simple differential game to show that the conclusion reached by the static literature is not robust, as the introduction of dynamics shows that firms do invest in R&D for environmental-friendly technologies throughout the game, as long as R&D is accompanied by an output restriction exhibiting a distinctively collusive flavour. We also examine the social planning case and the effects of Pigouvian taxation, to show that there exists a feasible tax rate inducing profit-seeking firms to choose a combination of output and R&D such that the resulting social welfare level is the same as in the first best
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Paper provided by Rimini Centre for Economic Analysis in its series Working Paper Series with number
wp21_09.
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