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Efficiency Inducing Taxation for Polluting Oligopolists


  • Hassan Benchekroun
  • Ngo Van Long


We derive corrective tax rules when firms are oligopolists whose production processes generate emissions that add to a stock of pollution that accumulates over time. In our model, firms play dynamic Cournot games among themselves, and the government designs a tax rule that corrects for both the externality associated with emissions and the market power of oligopolists. We show that there exists a time-independent tax rule that guides the oligopolists to achieve the socially optimum production path. The optimal tax per unit of output is dependent on the current level of pollution stock, and it may be negative (implying a subsidy) when the pollution stock is low. We obtain a rather surprising result: in some cases, the optimal tax rule gives firms a subsidy for an initial time interval even though under laissez-faire their output exceeds the socially optimal output at each point of time. This subsidy, howerver, induces firms to produce less than they would under laissez-faire, because they know that if they produce more then the subsidy will be reduced in the future and/or will soon turn into a tax. Règle de taxation permettant de réaliser l'optimalité pour un oligopole polluant. On considère une industrie oligopolistique dans laquelle la production s'accompagne d'émissions de pollution qui s'accumule pour former un stock. Dans ce modèle, les firment se livrent une concurrence à la Cournot. Le gouvernement propose une règle de taxation pour corriger à la fois l'effet de la concurrence imparfaite et l'externalité négative due aux émissions de pollution. On montre qu'il existe une règle de taxation qui ne dépend pas explicitement du temps et qui amène les firmes à choisir le sentier de production socialement optimal. Le taux optimal de taxation d'unité de production dépend du niveau du stock de pollution et peut être négatif (une subvention) pour des niveaux faibles de stock de pollution. On obtient un résultat qui peut sembler surprenant à première vue : il peut être optimal de subventionner la production pour au moins une période de temps, même si la production de la situation de laisser-faire (sans intervention) est à chaque instant au-dessus du niveau de production socialement optimal. Malgré la subvention, les firmes réduisent leur production par rapport à la situation de laisser-faire afin de prolonger la période de subvention et retarder le moment où la subvention se transformerait en taxe.

Suggested Citation

  • Hassan Benchekroun & Ngo Van Long, 1997. "Efficiency Inducing Taxation for Polluting Oligopolists," CIRANO Working Papers 97s-21, CIRANO.
  • Handle: RePEc:cir:cirwor:97s-21

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    References listed on IDEAS

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    More about this item


    Pollution; oligopoly; taxation; incentive; dynamic games; Pollution; oligopole; taxation; incitation; jeux dynamiques;

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water


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