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Emissions abatement R&D Dynamic Competition in Supply Schedules

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Abstract

This paper investigates the optimal environmental policy (the mix of emissions tax and R&D subsidy) when two firms, producing differentiated products, compete in the output market over time. Firms compete over supply schedules, which encompasses a continuum of market structures from Bertrand to Cournot. While production generates environmentally damaging emissions, firms can undertake R&D, which has the sole purpose of reducing emissions. In addition to characterising the optimal policy, we examine how the optimal tax and subsidy and the optimal level of abatement change as competition intensifies, as the dynamic parameters change and as the investment in abatement technology changes. In this setting, increased competition no longer necessarily leads to an increase in welfare. Instead, there are two forces. Competition increases welfare through its impact on the final goods price. However, lower prices result in larger quantities and more pollution. Our contribution is to show that the impact depends on the extent of the market, and the nature of preferences and technology.

Suggested Citation

  • Flavio Menezes & Jorge Pereira, 2015. "Emissions abatement R&D Dynamic Competition in Supply Schedules," Discussion Papers Series 540, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:540
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    More about this item

    Keywords

    Technology; R&D; Environment; Policy; Emission tax; Subsidy;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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