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Environmental Feedbacks and Optimal Taxation in Oligopoly

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  • Carraro, Carlo
  • Soubeyran, Antoine

Abstract

The paper analyses the problem of optimal taxation in oligopoly when environmental degradation induced by the industry production process feeds back into market demand. The main assumption is that economic agents and the policy-maker care about the environment only because its degradation affects the industry's economic performance. The environment does not enter directly either into the utility function or into the social welfare function. We consider an industry in which n asymmetric firms compete à la Cournot. Each firm is subject to the same environmental legislation, either because they belong to the same country, or because environmental policy is internationally coordinated. Asymmetry arises because firms use different technologies (their marginal costs differ). The first part of the paper focuses on the comparative static effects of the environmental tax. We show that market share and profits of some firms can increase when the tax rate is raised if environmental feedbacks are sufficiently high and the industry is not very asymmetric. Moreover, the relationship between industry concentration and emission taxation is explored. The second part of the paper faces the problem of optimal taxation. We show that there may exist an optimal tax such that some firms increase their profits and/or their market share. Moreover, the optimal tax rate is inversely related to the industry asymmetry (the variance of firms' marginal costs), and positively related to the perceived environmental damage.

Suggested Citation

  • Carraro, Carlo & Soubeyran, Antoine, 1995. "Environmental Feedbacks and Optimal Taxation in Oligopoly," CEPR Discussion Papers 1156, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1156
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    Citations

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    Cited by:

    1. Carlo Carraro, 1998. "New Economic Theories," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 11(3), pages 365-381, April.
    2. Fischer, Carolyn, 2011. "Market power and output-based refunding of environmental policy revenues," Resource and Energy Economics, Elsevier, vol. 33(1), pages 212-230, January.
    3. Fredrik Carlsson, 2000. "Environmental Taxation and Strategic Commitment in Duopoly Models," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 15(3), pages 243-256, March.
    4. Anastasios Xepapadeas, 2001. "Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions under Uncertainty and Irreversibility," NBER Chapters,in: Behavioral and Distributional Effects of Environmental Policy, pages 281-308 National Bureau of Economic Research, Inc.
    5. Fischer, Carolyn, 2003. "Output-Based Allocation of Environmental Policy Revenues and Imperfect Competition," Discussion Papers dp-02-60, Resources For the Future.

    More about this item

    Keywords

    Environment; Market Structure; Oligopoly; Taxation; Welfare;

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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