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Time-inconsistent environmental policies with a consumer-friendly firm: tradable permits versus emission tax

Author

Listed:
  • Garcia, Arturo
  • Leal, Mariel
  • Lee, Sang-Ho

Abstract

This study considers the timing of environmental policies with a consumer-friendly firm having abatement technology, and compares two market-based regulations: tradable permits and emission tax regulations. When the government can credibly commit its policy, we show that the equilibrium outcomes under both policies are equivalent in terms of permits price and tax rate. Under the non-committed policy, however, the equivalence breaks down because firms have different incentives to induce time-consistent policy to be adjusted ex post. In particular, compared to pre-committed government, firms abate less emission to induce higher emission quotas under the permits policy while a consumer-friendly firm abates more emissions to reduce tax rate under the tax policy. Finally, we show that tax policy can induce higher welfare and lower environmental damage when the concern on consumer surplus is moderate.

Suggested Citation

  • Garcia, Arturo & Leal, Mariel & Lee, Sang-Ho, 2018. "Time-inconsistent environmental policies with a consumer-friendly firm: tradable permits versus emission tax," MPRA Paper 86407, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:86407
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    File URL: https://mpra.ub.uni-muenchen.de/86407/1/MPRA_paper_86407.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    abatement technology; consumer-friendly firm; environmental policy; tradable permits; emission tax;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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