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Environmental Taxes in Duopoly with Soft Capacity Constraints

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  • Vetter Henrik

    (Statsbiblioteket, Victor Albecks Vej 1, 8000 Århus C, Denmark)

Abstract

This paper examines an environmental tax when duopolistic firms engage in capacity-price competition. Under soft capacity constraints, the equilibrium ranges from Bertrand competition to Cournot competition, depending upon parameters. It is shown that a unit tax potentially changes the qualitative nature of equilibrium. That is, the type of tax affects the mode of competition between firms. This effect gives rise to the result that a unit tax is sometimes an inefficient instrument. The explanation is that the tax that leads to the first-best under Cournot competition will in fact sustain Bertrand competition, and vice versa.

Suggested Citation

  • Vetter Henrik, 2014. "Environmental Taxes in Duopoly with Soft Capacity Constraints," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(4), pages 1-16, October.
    • Handle: RePEc:bpj:bejeap:v:14:y:2014:i:4:p:16:n:7
    DOI: 10.1515/bejeap-2013-0138
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    References listed on IDEAS

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    1. Joanna Poyago-Thotoky, 2003. "Optimal Environmental Taxation, R&D Subsidization and the Role of Market Conduct," Finnish Economic Papers, Finnish Economic Association, vol. 16(1), pages 15-26, Spring.
    2. Kurtyka, Oliwia & Mahenc, Philippe, 2011. "The switching effect of environmental taxation within Bertrand differentiated duopoly," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 267-277, September.
    3. Katsoulacos, Yannis & Xepapadeas, Anastasios, 1995. " Environmental Policy under Oligopoly with Endogenous Market Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(3), pages 411-420, September.
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