The Impact of Environmental Taxes on Firms' Technology and Entry Decisions
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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- Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003.
"Instrument choice for environmental protection when technological innovation is endogenous,"
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- Parry, Ian & Pizer, William & Fischer, Carolyn, 1998. "Instrument Choice for Environmental Protection When Technological Innovation is Endogenous," Discussion Papers dp-99-04, Resources For the Future.
- 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.
- David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
- Helland, Eric & Matsuno, Mayumi, 2003. "Pollution Abatement as a Barrier to Entry," Journal of Regulatory Economics, Springer, vol. 24(2), pages 243-259, September.
- 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 139-147, March.
- Juan-Pablo Montero, 2002.
"Market Structure and Environmental Innovation,"
Journal of Applied Economics,
Universidad del CEMA, vol. 5, pages 293-325, November.
- 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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