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Second Best Environmental Policies under Uncertainty

  • Fabio Antoniou

    ()

    (Department of International and European Economic Studies, Athens University of Economics and Business, 76 Patision Street, Athens 104 34, Greece)

  • Panos Hatzipanayotou

    ()

    (Department of International and European Economic Studies, Athens University of Economics and Business, 76 Patision Street, Athens 104 34, Greece, and Center of for Economic Studies and the Ifo Institute of Economic Research, Munich (CESifo))

  • Phoebe Koundouri

    ()

    (Department of International and European Economic Studies, Athens University of Economics and Business, 76 Patision Street, Athens 104 34, Greece)

Governments use environmental policies, such as an emissions standard or a tax, to control pollution and for rent shifting purposes. Contrary to firms, however, governments are unable to perfectly foresee the actual level of demand and the cost of abatement. Our results suggest that not only the presence but also the absolute level of uncertainty matters for the optimal choice of the environmental policy instrument. Moreover, the optimality conditions under strategic behavior may lead to welfare losses relative to the cooperative outcomes because of under-regulation and lack of policy coordination between the two countries.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 78 (2012)
Issue (Month): 3 (January)
Pages: 1019-1040

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Handle: RePEc:sej:ancoec:v:78:3:y:2012:p:10191-1040
Contact details of provider: Web page: http://www.southerneconomic.org/

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