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Using Effluent Charges in Promoting Investment in Water Pollution Control Technology: A Model of Coordination Failure among Firms

  • Geethanjali Selvaretnam
  • Kannika Thampanishvong

Untreated wastewater being directly discharged into rivers is a very harmful environmental hazard that needs to be tackled urgently in many countries. In order to safeguard the river ecosystem and reduce water pollution, it is important to have an effluent charge policy that promotes the investment of wastewater treatment technology by domestic ?firms. This paper considers the strategic interaction between the government and the domestic firms regarding the investment in the wastewater treatment technology and the design of optimal effluent charge policy that should be implemented. In this model, the higher is the proportion of non-investing ?firms, the higher would be the probability of having to incur an effluent charge and the higher would be that charge. On one hand the government needs to impose a sufficiently strict policy to ensure that firms have strong incentive to invest. On the other hand, it cannot be too strict that it drives out ?firms which cannot afford to invest in such expensive technology. The paper analyses the factors that affect the probability of investment in this technology. It also explains the difficulty of imposing a strict environment policy in countries that have too many small firms which cannot afford to invest, unless subsidised.

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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 1009.

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Date of creation: Nov 2010
Date of revision:
Handle: RePEc:san:crieff:1009
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  1. Emmanuel Petrakis & Joanna Poyago-Theotoky,, . "Environmental Impact of Technology Policy: R&D Subsidies Versus R&D Cooperation," Discussion Papers 97/16, University of Nottingham, School of Economics.
  2. Graciela Chichilnisky & Geoffrey Heal, 1995. "Markets for Tradeable CO2 Emission Quotas Principles and Practice," OECD Economics Department Working Papers 153, OECD Publishing.
  3. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  4. Chichilnisky, Graciela & Heal, Geoffrey, 1995. "Markets with tradable CO2 emission quotas: principles and practice," MPRA Paper 8486, University Library of Munich, Germany.
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