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Environmental policy in a linear city model of product differentiation

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  • Espínola-Arredondo, Ana
  • Zhao, Huan

Abstract

This paper analyzes how a tax/subsidy policy affects consumers' behavior when choosing between green (pollution-free goods) and conventional products, and its effects on welfare when a proportion of consumers have strong preferences for green goods. We analyze a Hotelling's linear city model where final products by two firms are symmetric in all dimensions except for the externality their production process generates. Our efficiency comparisons suggest that, under a setting of horizontal product differentiation, an environmental regulation (either on polluting firms or consumers buying their products) yields higher social welfare than the absence of policy. Moreover, the proportion of consumers who prefer green products affects the welfare gains from a subsidy or tax policy.

Suggested Citation

  • Espínola-Arredondo, Ana & Zhao, Huan, 2012. "Environmental policy in a linear city model of product differentiation," Environment and Development Economics, Cambridge University Press, vol. 17(04), pages 461-477, August.
  • Handle: RePEc:cup:endeec:v:17:y:2012:i:04:p:461-477_00
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    References listed on IDEAS

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    1. José Moraga-González & Noemi Padrón-Fumero, 2002. "Environmental Policy in a Green Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(3), pages 419-447, July.
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    Cited by:

    1. Gori, Giuseppe Francesco & Lambertini, Luca, 2013. "Trade liberalisation between asymmetric countries with environmentally concerned consumers," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 549-560.
    2. Ana Espínola-Arredondo & Félix Muñoz-García, 2016. "An excessive development of green products?," Economics of Governance, Springer, vol. 17(2), pages 101-129, May.
    3. Mantovani, Andrea & Tarola, Ornella & Vergari, Cecilia, 2016. "Hedonic and environmental quality: A hybrid model of product differentiation," Resource and Energy Economics, Elsevier, vol. 45(C), pages 99-123.
    4. Shizuka Nishikawa, 2015. "Regulating Cournot Oligopoly with Environmental Externalities," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(4), pages 449-462, December.

    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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