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Optimal Tax Policy under Environmental Quality Competition


  • C. Lombardini-Riipinen



This paper studies the socially optimal emission and commodity tax policy when consumers are willing to pay a price-premium for environmentally friendlier variants of a commodity vertically differentiated in environmental quality. The first-best levels of quality can be obtained by a combination of a uniform ad valorem tax and an emission tax (or a subsidy for buying green products). The first-best emission tax is higher than the social valuation of the positive externality associated with average environmental quality. Regardless of environmentally conscious consumers, if only one instrument is available, the second-best emission tax is equal to the social valuation of the positive externality associated with average environmental quality. A uniform ad valorem tax increases welfare only if the social valuation of the positive externality associated with average environmental quality is low enough. Copyright Springer 2005

Suggested Citation

  • C. Lombardini-Riipinen, 2005. "Optimal Tax Policy under Environmental Quality Competition," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(3), pages 317-336, November.
  • Handle: RePEc:kap:enreec:v:32:y:2005:i:3:p:317-336
    DOI: 10.1007/s10640-005-4680-z

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    References listed on IDEAS

    1. G. Ecchia & L. Lambertini, 1998. "Market Coverage and the Existence of Equilibrium in a Vertically Differentiated Duopoly," Working Papers 311, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Michael Kuhn, "undated". "Low Quality Leadership in Vertically Differentiated Duopoly," Discussion Papers 00/38, Department of Economics, University of York.
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    More about this item


    ad valorem taxes; emission taxes; environmental quality; imperfect competition; subsidies; vertical differentiation; D62; H21; L13;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets


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