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