Pollution Tax under Lobbying Duopolists
We study a model which explains a politically determined pollution tax outcome under asymmetric duopoly. We assume an asymmetry of firms in the pollution emissions per unit of output. The polluting duopoly and three-stage political game are considered. We derive the equilibrium tax rate and show that it might excess the marginal external damages, even without an environmental group. The politically determined tax rate is decomposed to the marginal external damages, the imperfect competition effect, and the lobbying effect. Under linear demand and cost functions, we derive the condition that Pigouvian taxation is politically determined. The effect on the equilibrium tax of firm heterogeneity is discussed.
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