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Emission Tax or Standard? The Role of Productivity Dispersion

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  • Zhe Li
  • Shouyong Shi

Abstract

When a society wants to control aggregate emission under a certain target level, is it more desirable to impose a tax or a regulatory standard on emission? To answer this question, we explore a model where plants are heterogeneous in productivity and monopolistically competitive in the production of a set of varieties of (dirty-) goods whose by-product is emission. The main result is that the standard yields higher welfare than the tax if and only if productivity dispersion is small and the monopoly power in the dirty-goods sector is strong. In the process of obtaining this result, we find that, if the plants have no access to an abatement technology, then the tax dominates the standard unambiguously. When the plants do have access to an abatement technology, there can be less price distortion under the standard than under the tax, in which case the standard can yield higher welfare. These results illustrate that productivity dispersion is important for evaluating market-based environmental policies relative to non-market based policies.

Suggested Citation

  • Zhe Li & Shouyong Shi, 2010. "Emission Tax or Standard? The Role of Productivity Dispersion," Working Papers tecipa-409, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-409
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    References listed on IDEAS

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    1. repec:spo:wpmain:info:hdl:2441/14g286e42n8bl9is6h16b18kes is not listed on IDEAS
    2. Cyril Monnet & Ted Temzelides, 2016. "Monetary emissions trading mechanisms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 12(1), pages 85-100, March.
    3. Lamperti, Francesco & Napoletano, Mauro & Roventini, Andrea, 2020. "Green Transitions And The Prevention Of Environmental Disasters: Market-Based Vs. Command-And-Control Policies," Macroeconomic Dynamics, Cambridge University Press, vol. 24(7), pages 1861-1880, October.
    4. Cui, Jingbo, 2012. "Three essays on biofuel, environmental economics, and international trade," ISU General Staff Papers 201201010800003311, Iowa State University, Department of Economics.
    5. Cui, Jingbo & Ji, Yongjie, 2011. "The Environment, Trade and Innovation with Heterogeneous Firms: A Numerical Analysis," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103478, Agricultural and Applied Economics Association.
    6. repec:hal:spmain:info:hdl:2441/14g286e42n8bl9is6h16b18kes is not listed on IDEAS
    7. Dana C. Andersen, 2016. "Accounting for Firm Exit and Loss of Variety in the Welfare Cost of Regulations," Working Papers 2016-9, University of Alberta, Department of Economics.

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    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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