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The Impact of Environmental Taxes on Firms' Technology and Entry Decisions

  • Boying Liu


  • Ana Espinola-Arredondo

    (School of Economic Sciences, Washington State University)

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    This paper investigates under which conditions a regulator can strate- gically set an emission fee as a tool to induce a domestic firm to adopt a non-polluting technology and deter entry. We consider a market in which a monopolistic incumbent faces the threat of entry from firms that can choose between a dirty and a green technology. Our results show that, despite the fact of facing a polluting incumbent, an entrant might find it profitable to acquire a clean technology if the environmental tax is strin- gent enough. In addition, we demonstrate that an incumbent that adopts a clean technology is more likely to deter entry than an incumbent that keeps its dirty technology. Finally, we also show that a non-polluting duopoly market, in which all firms acquire clean technology, is socially preferred to a non-polluting monopoly market if the green technology cost is sufficiently low. However, if the clean technology becomes more expensive it may be socially optimal to have a polluting duopoly market in which only one firm adopts the green technology.

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    File Function: First version, 2013
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    Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2013-2.

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    Length: 24 pages
    Date of creation: Jan 2013
    Date of revision:
    Handle: RePEc:wsu:wpaper:espinola-14
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    1. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
    2. Kennedy Peter W., 1994. "Equilibrium Pollution Taxes in Open Economies with Imperfect Competition," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 49-63, July.
    3. Juan-Pablo Montero, 2002. "Market Structure and Environmental Innovation," Documentos de Trabajo 215, Instituto de Economia. Pontificia Universidad Católica de Chile..
    4. Buchanan, James M & Tullock, Gordon, 1975. "Polluters' Profits and Political Response: Direct Controls Versus Taxes," American Economic Review, American Economic Association, vol. 65(1), pages 139-47, March.
    5. Helland, Eric & Matsuno, Mayumi, 2003. "Pollution Abatement as a Barrier to Entry," Journal of Regulatory Economics, Springer, vol. 24(2), pages 243-59, September.
    6. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
    7. Espínola-Arredondo, Ana & Muñoz-García, Félix, 2013. "When does environmental regulation facilitate entry-deterring practices," Journal of Environmental Economics and Management, Elsevier, vol. 65(1), pages 133-152.
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