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Pollution abatement subsidies and the eco-industry

Author

Listed:
  • Maia David

    (ECO-PUB - Economie Publique - INRA - Institut National de la Recherche Agronomique - AgroParisTech)

  • Bernard Sinclair-Desgagné

    (HEC Montréal - HEC Montréal, CIRANO - Centre interuniversitaire de recherche en analyse des organisations [Montréal, Canada] = Center for Interuniversity Research and Analysis on Organizations [Montréal, Canada])

Abstract

This paper considers the combination of pollution taxes and abatement subsidies when some polluting firms procure their abatement goods and services from an oligopolistic eco-industry. The regulator must here cope with two simultaneous price distortions: one that comes from pollution and the other which is caused by the eco-industry's market power. In this context, we show that taxing emissions while subsidizing polluters' abatement efforts cannot lead to first-best, but the opposite occurs provided it is the eco-industry's output which is subsidized. When public transfers also create distortions, welfare can be higher if the regulator uses only an emission tax, but subsidizing abatement suppliers while taxing emissions remains optimal when the eco-industry is concentrated.

Suggested Citation

  • Maia David & Bernard Sinclair-Desgagné, 2010. "Pollution abatement subsidies and the eco-industry," Post-Print hal-01172938, HAL.
    • Handle: RePEc:hal:journl:hal-01172938
    DOI: 10.1007/s10640-009-9315-3
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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
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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