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Optimal Emission Tax with Endogenous Location Choice of Duopolistic Firms

Author

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  • Ikefuji, Masako
  • Itaya, Jun-ichi
  • Okamura, Makoto

Abstract

This paper explores optimal environmental tax policy under which duopoly firms strategically choose the location of their plants in a simple three-stage game. We examine how the relationship between the optimal emission tax and the choice of location of duopoly firms affects the welfare of the home country. We characterize the relationship between the optimal emission tax and the fixed cost, depending on the degree of environmental damage from production. Finally, we show the existence of asymmetric equilibrium in which either firm chooses relocation of its plant even if the duopoly firms are identical ex ante.

Suggested Citation

  • Ikefuji, Masako & Itaya, Jun-ichi & Okamura, Makoto, 2010. "Optimal Emission Tax with Endogenous Location Choice of Duopolistic Firms," Sustainable Development Papers 59377, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemdp:59377
    DOI: 10.22004/ag.econ.59377
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    Cited by:

    1. Francesca Sanna-Randaccio & Roberta Sestini & Ornella Tarola, 2017. "Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(2), pages 379-401, June.
    2. Laura Birg & Jan S. Voßwinkel, 2021. "Emission taxes, firm relocation, and product differentiation," European Journal of Law and Economics, Springer, vol. 51(2), pages 297-345, April.
    3. Ornella Tarola & Emmanuelle Taugourdeau, 2024. "Does leadership in policy setting reduce pollution and make countries better off?," Working Papers hal-04765513, HAL.
    4. Yan, Yan & Li, Yi, 2023. "Technology spillovers, strategic environmental policy, and foreign direct investment," Energy Economics, Elsevier, vol. 127(PA).
    5. Noha Elboghdadly & Michael Finus, 2020. "Strategic Climate Policies with Endogenous Plant Location: The Role of Border Carbon Adjustments," Graz Economics Papers 2020-07, University of Graz, Department of Economics.
    6. Thierry Madiès & Ornella Tarola & Emmanuelle Taugourdeau, 2022. "Tax haven, pollution haven or both?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(6), pages 1527-1560, December.
    7. Voßwinkel, Jan & Birg, Laura, 2018. "Emission Taxes, Firm Relocation, and Quality Differences," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168298, Verein für Socialpolitik / German Economic Association, revised 2018.
    8. Giulia Ceccantoni & Ornella Tarola & Cecilia Vergari, 2023. "Tax and pollution in a vertically differentiated duopoly: When consumers matter," Metroeconomica, Wiley Blackwell, vol. 74(2), pages 416-445, May.
    9. Julie Ing & Jean-Philippe Nicolai, 2019. "Dirty versus Clean Firms’ Relocation under International Trade and Imperfect Competition," CER-ETH Economics working paper series 19/319, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    10. Jihad C. Elnaboulsi & Wassim Daher & Yiğit Sağlam, 2023. "Environmental taxation, information precision, and information sharing," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(2), pages 301-341, April.
    11. Daniel Nachtigall, 2019. "Dynamic Climate Policy Under Firm Relocation: The Implications of Phasing Out Free Allowances," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 473-503, September.
    12. Abdul Baki, Ghina & Marrouch, Walid, 2022. "Environmental taxation in the Bertrand differentiated duopoly: New insights," Resource and Energy Economics, Elsevier, vol. 70(C).
    13. Cheng Haitao & Kato Hayato & Obashi Ayako, 2021. "Is Environmental Tax Harmonization Desirable in Global Value Chains?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 21(1), pages 379-416, January.
    14. Birg, Laura & Voßwinkel, Jan, 2020. "Green Consumers, Emission Taxes, and Firm Relocation," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224639, Verein für Socialpolitik / German Economic Association.
    15. André, F.J. & Ranocchia, C. & Rubio, S.J., 2025. "Porter Hypothesis vs. Pollution Haven Hypothesis: Can an environmental policy generate a win–win solution?," Energy Economics, Elsevier, vol. 146(C).
    16. Daniel Nachtigall, 2016. "Climate policy under firm relocation: The implications of phasing out free allowances," Working Papers 2016007, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    17. Estay, Manuel & Stranlund, John K., 2022. "Entry, location, and optimal environmental policies," Resource and Energy Economics, Elsevier, vol. 70(C).
    18. G. Ceccantoni & O. Tarola & C. Vergari, 2017. "Relative tax in a vertically differentiated market: the key role of consumers in environment," Working Papers wp2005, Dipartimento Scienze Economiche, Universita' di Bologna.
    19. Iida, Takeshi & Mukherjee, Arijit, 2025. "Environmental taxes, offshoring and welfare: The effects of environmental damage and pollution intensity," Journal of Environmental Economics and Management, Elsevier, vol. 130(C).
    20. Noha Elboghdadly & Michael Finus, 2022. "Strategic climate policy with endogenous plant location: The role of border carbon adjustments," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1266-1309, December.
    21. Nachtigall, Daniel, 2016. "Climate policy under firm relocation: The implications of phasing out free allowances," Discussion Papers 2016/25, Free University Berlin, School of Business & Economics.

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    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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