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Revisiting the Environmental Subsidy in the Presence of an Eco-Industry


  • Maia David
  • Bernard Sinclair-Desgagné


This paper re-considers environmental subsidies in the context where polluting firms procure their abatement goods and services from a specialized oligopoly. In order to maximize social welfare, a regulator must then simultaneously alleviate two distortions: one that comes from pollution and the other that is due to the environment firms' market power. We find that the combination of an emission tax and a subsidy to polluters cannot achieve the first-best, while the opposite positive conclusion obtains if the subsidy is granted instead to environment firms. When public transfers are themselves subject to distortions, however, welfare may be higher if only an emission tax is used.

Suggested Citation

  • Maia David & Bernard Sinclair-Desgagné, 2006. "Revisiting the Environmental Subsidy in the Presence of an Eco-Industry," Working Papers 2006/04, INRA, Economie Publique.
  • Handle: RePEc:apu:wpaper:2006/04

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    References listed on IDEAS

    1. Ian Parry, 1998. "A Second-Best Analysis of Environmental Subsidies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(2), pages 153-170, May.
    2. Eberhard Feess & Gerd Muehlheusser, 2002. "Strategic Environmental Policy, Clean Technologies and the Learning Curve," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 23(2), pages 149-166, October.
    3. Maia David & Bernard Sinclair-Desgagné, 2005. "Environmental Regulation and the Eco-Industry," Journal of Regulatory Economics, Springer, vol. 28(2), pages 141-155, September.
    4. Stranlund, John K., 1997. "Public Technological Aid to Support Compliance to Environmental Standards," Journal of Environmental Economics and Management, Elsevier, vol. 34(3), pages 228-239, November.
    5. Fullerton Don & Mohr Robert D., 2003. "Suggested Subsidies are Sub-optimal Unless Combined with an Output Tax," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-22, January.
    6. Lerner, Abba P, 1972. "Pollution Abatement Subsidies," American Economic Review, American Economic Association, vol. 62(5), pages 1009-1010, December.
    7. Fredriksson, Per G., 1998. "Environmental policy choice: Pollution abatement subsidies," Resource and Energy Economics, Elsevier, vol. 20(1), pages 51-63, March.
    8. Alain-Désiré Nimubona & Bernard Sinclair-Desgagné, 2013. "The Pigouvian Tax Rule in the Presence of an Eco-Industry," Economics Bulletin, AccessEcon, vol. 33(1), pages 747-752.
    9. Conrad Klaus, 1993. "Taxes and Subsidies for Pollution-Intensive Industries as Trade Policy," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 121-135, September.
    10. Joan Canton & Antoine Soubeyran & Hubert Stahn, 2008. "Environmental Taxation and Vertical Cournot Oligopolies: How Eco-industries Matter," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(3), pages 369-382, July.
    11. Mads Greaker, 2004. "Industrial Competitiveness and Diffusion of New Pollution Abatement Technology - a new look at the Porter-hypothesis," Discussion Papers 371, Statistics Norway, Research Department.
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    More about this item


    Environmental subsidies; Pigouvian taxes; Environment industry;

    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
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy


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