Environmental policies with green network effect and price discrimination

We consider a duopolistic market in which a green rm competes with a brown rival, and both rms o¤er vertically di¤erentiated products. Consumers are heterogeneous both in their willingness to pay for intrinsic quality and in their environmental concern. The latter is positively related to the green rms market share, giving rise to a green network e¤ect. We characterize how price and quality schedules are set and how consumers sort between the two rms at the market equilibrium. When considering pollution from both consumption and production, we compute total welfare and evaluate the impact of an emission tax, and of a subsidy for the consumption of the green good. Our analysis demonstrates that e¢ ciency can be achieved through an emission tax, which restores the optimal di¤erential between rmsintrinsic qualities, combined with a discriminatory subsidy, which re-establishes the optimal sorting of consumers.