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Environmental Policy to Foster a Green Differentiated Energy Market

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  • Gutierrez-Hita, Carlos
  • Martinez-Sanchez, Francisco

Abstract

Many products are made by technological processes that cause environmental damage. Current environmental concerns are affecting firms' technological processes as a result of government intervention in markets but also due to environmental awareness on the part of consumers. This paper assumes a spatial competition model where two firms sell a homogeneous product with input differentiation: the product is made by green and polluting inputs. In a two-stage game firms first decide what technology bundle to use (the ratio of green and polluting inputs) and then Bertrand competition takes place. First, it is shown that in the absence of government intervention both firms prefer to produce by using a bundle of green and polluting technologies which is not welfare maximizing. Second, the option of subsidizing green technology and the existence of a publicly-owned firm are analyzed. Overall, both policies yield a more environmentally-friendly technology bundle, except when costs of green energy technologies are high enough. Moreover, environmental social welfare is enhanced.

Suggested Citation

  • Gutierrez-Hita, Carlos & Martinez-Sanchez, Francisco, 2013. "Environmental Policy to Foster a Green Differentiated Energy Market," MPRA Paper 47263, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:47263
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    References listed on IDEAS

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    More about this item

    Keywords

    Differentiated inputs · Environmental policy · Green market · Mixed duopoly · Subsidy;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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