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How to Turn an Industry Green: Taxes versus Subsidies

  • Susanne Dröge


  • Philipp Schröder


Environmental policies frequently target the ratio of dirty to green output within the same industry. To achieve such targets, the green sector may be subsidized or the dirty sector be taxed. We show that in a monopolistic competition setting, the two policy approaches have different welfare effects, depending on the design of the instrument (ad valorem versus unit instrument) and the initial situation (size of the dirty sector). For a strong green policy (a severe reduction of the dirty sector) a tax is the dominant instrument. If initially the dirty sector is important, then for moderate policy targets a subsidy may be the superior tool. These findings have implications for policies such as the Californian Zero Emission Bill. Copyright Springer Science+Business Media, Inc. 2005

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Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 27 (2005)
Issue (Month): 2 (November)
Pages: 177-202

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Handle: RePEc:kap:regeco:v:27:y:2005:i:2:p:177-202
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  1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  2. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
  3. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249.
  4. Conrad, Klaus & Wang, Jianmin, 1993. "The effect of emission taxes and abatement subsidies on market structure," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 499-518.
  5. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  6. Alexander Haupt, 2000. "Environmental Product Standards, International Trade and Monopolistic Competition," International Tax and Public Finance, Springer, vol. 7(4), pages 585-608, August.
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