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Emission Tax or Standard? The Role of Productivity Dispersion

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  • Zhe Li
  • Shouyong Shi

Abstract

When a society wants to control aggregate emission under a certain target level, is it more desirable to impose a tax or a regulatory standard on emission? To answer this question, we explore a model where plants are heterogeneous in productivity and monopolistically competitive in the production of a set of varieties of (dirty-) goods whose by-product is emission. The main result is that the standard yields higher welfare than the tax if and only if productivity dispersion is small and the monopoly power in the dirty-goods sector is strong. In the process of obtaining this result, we find that, if the plants have no access to an abatement technology, then the tax dominates the standard unambiguously. When the plants do have access to an abatement technology, there can be less price distortion under the standard than under the tax, in which case the standard can yield higher welfare. These results illustrate that productivity dispersion is important for evaluating market-based environmental policies relative to non-market based policies.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-409.

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Length: 36 pages
Date of creation: 12 Sep 2010
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-409

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Keywords: emission tax; standard; productivity dispersion; abatement.;

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  1. Freeman, Jody & Kolstad, Charles D., 2006. "Moving to Markets in Environmental Regulation: Lessons from Twenty Years of Experience," OUP Catalogue, Oxford University Press, number 9780195189650, September.
  2. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
  3. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  4. Kelly, David L., 2005. "Price and quantity regulation in general equilibrium," Journal of Economic Theory, Elsevier, vol. 125(1), pages 36-60, November.
  5. Mandell, Svante, 2008. "Optimal mix of emissions taxes and cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 131-140, September.
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Cited by:
  1. Cui, Jingbo & Ji, Yongjie, 2011. "The Environment, Trade and Innovation with Heterogeneous Firms: A Numerical Analysis," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103478, Agricultural and Applied Economics Association.
  2. Cyril Monnet & Ted Temzelides, 2014. "Monetary Emissions Trading Mechanisms," CESifo Working Paper Series 4633, CESifo Group Munich.

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