Regulating a Polluting Oligopoly: Emission Tax or Voluntary Agreement?[Régulation d'un oligopole polluant : taxe ou approche volontaire ?]

This paper compares, in a polluting oligopoly, an emission tax and a form of environmental policy calledvoluntary agreement (VA). Here there are two ways of reducing pollution: output contraction and end-of-pipe abatement. Given the imperfect competition, firms' reaction to the tax is sub-optimal. They reduceoutput excessively in order to raise the price and do not abate enough. The VA is a take-it-or-leave-it con-tract on abatement effort, offered to the firms with the threat of a tax. It has a limited effect on output andalways allows higher abatement than the tax. We find that this kind of VA may be more efficient than thetax in a concentrated industry, when pollution is not too harmful and when the abatement technology israther efficient and cheap.