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Optimal environmental taxation, R&D subsidization and the role of market conduct

  • Joanna Poyago-Theotoky

This paper examines the optimal environmental policy in a differentiated goods duopoly with either price- or quantity-setting firms, where firms invest in environmental R&D that reduces emissions. It is shown that in quantity (Cournot) competition, the emission tax is always lower than marginal damages. With price (Bertrand) competition, the emission tax is generally lower than marginal damages. However, for the case of very undifferentiate products, the emission tax is equal to marginal damages, that is it approaches the first-best tax. Moreover, the Cornot emission tax is always lower than the Bertrand emission tax. Concerning the R&D subsidy, the comparison crucially depends on the degree of product differentiation in the initial emissions coeffiecient.

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File URL: http://www.st-andrews.ac.uk/economics/papers/dp0309.pdf
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Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200309.

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Date of creation: 15 Dec 2003
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Handle: RePEc:san:wpecon:0309
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  1. Beath, John & Katsoulacos, Yannis & Ulph, David, 1989. "Strategic R&D Policy," Economic Journal, Royal Economic Society, vol. 99(395), pages 74-83, Supplemen.
  2. Jaskold Gabszewicz, Jean & Vial, Jean-Philippe, 1972. "Oligopoly "A la cournot" in a general equilibrium analysis," Journal of Economic Theory, Elsevier, vol. 4(3), pages 381-400, June.
  3. Barnett, A H, 1980. "The Pigouvian Tax Rule under Monopoly," American Economic Review, American Economic Association, vol. 70(5), pages 1037-41, December.
  4. Barbara J. Spencer & James A. Brander, 1983. "International R&D Rivalry and Industrial Strategy," NBER Working Papers 1192, National Bureau of Economic Research, Inc.
  5. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  6. d'ASPREMONT, Claude & JACQUEMIN, Alexis, . "Cooperative and noncooperative R&D in duopoly with spillovers," CORE Discussion Papers RP -823, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Shaffer, Sherrill, 1995. "Optimal Linear Taxation of Polluting Oligopolists," Journal of Regulatory Economics, Springer, vol. 7(1), pages 85-100, January.
  8. Novshek, William & Sonnenschein, Hugo, 1978. "Cournot and Walras equilibrium," Journal of Economic Theory, Elsevier, vol. 19(2), pages 223-266, December.
  9. Ulph, Alistair, 1996. "Environmental Policy and International Trade when Governments and Producers Act Strategically," Journal of Environmental Economics and Management, Elsevier, vol. 30(3), pages 265-281, May.
  10. R. Simpson, 1995. "Optimal pollution taxation in a Cournot duopoly," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 6(4), pages 359-369, December.
  11. Katsoulacos, Yannis & Xepapadeas, Anastasios, 1995. " Environmental Policy under Oligopoly with Endogenous Market Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(3), pages 411-20, September.
  12. Poyago-Theotoky, Joanna & Teerasuwannajak, Khemarat, 2002. "The Timing of Environmental Policy: A Note on the Role of Product Differentiation," Journal of Regulatory Economics, Springer, vol. 21(3), pages 305-16, May.
  13. Myles, Gareth D., 1989. "Ramsey tax rules for economies with imperfect competition," Journal of Public Economics, Elsevier, vol. 38(1), pages 95-115, February.
  14. Lee, Sang-Ho, 1999. "Optimal Taxation for Polluting Oligopolists with Endogenous Market Structure," Journal of Regulatory Economics, Springer, vol. 15(3), pages 293-308, May.
  15. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
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