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A Stochastic Optimal Control Model of Pollution Abatement

  • D. Dragone
  • L. Lambertini
  • G. Leitmann
  • A. Palestini

We model a dynamic monopoly with environmental externalities,investigating the adoption of a tax levied on the firm's instantaneous contribution to the accumulation of pollution. The latter process is subject to a shock, which is i.i.d. across instants. We prove the existence of an optimal tax rate such that the monopoly replicates the same steady state welfare level as under social planning. Yet, the corresponding output level, R&D investment for environmental friendly technologies and surplus distribution necessarily differ from the socially optimal ones.

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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 681.

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Date of creation: Nov 2009
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Handle: RePEc:bol:bodewp:681
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  1. Benchekroun, Hassan & van Long, Ngo, 1998. "Efficiency inducing taxation for polluting oligopolists," Journal of Public Economics, Elsevier, vol. 70(2), pages 325-342, November.
  2. D. Dragone & L. Lambertini & A. Palestini, 2009. "The Incentive to Invest in Environmental-Friendly Technologies: Dynamics Makes a Difference," Working Papers 658, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Benchekroun, Hassan & Van Long, Ngo, 2002. "On the multiplicity of efficiency-inducing tax rules," Economics Letters, Elsevier, vol. 76(3), pages 331-336, August.
  4. Karp Larry & Livernois John, 1994. "Using Automatic Tax Changes to Control Pollution Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 38-48, July.
  5. Luca Lambertini, 2005. "Stackelberg leadership in a dynamic duopoly with stochastic capital accumulation," Journal of Evolutionary Economics, Springer, vol. 15(4), pages 443-465, October.
  6. Paul Klemperer & Margaret Meyer, 1986. "Price Competition vs. Quantity Competition: The Role of Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 618-638, Winter.
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