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Environmental Policy in a Linear City Model of Product Differentiation

  • Ana Espinola-Arredondo
  • Huan Zhao

    ()

    (School of Economic Sciences, Washington State University)

This paper analyzes how a tax/subsidy policy affects consumers? behavior when choosing between green (pollution free goods) and conventional products and its effects on welfare when some consumers have strong preferences for green goods. We develop a three stage complete information game, using the Hotelling?s linear city model. We show that when products are identical in all respects except in their environmental properties, a tax/subsidy policy performs better than the case without policy. Our efficiency comparisons suggest that under a setting of horizontal product differentiation a tax/subsidy (either on consumers or polluting ?firms) produces higher social welfare than the absence of policy. Moreover, the proportion of consumers who prefer green products affects the welfare gains from a subsidy or tax policy.

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File URL: http://faculty.ses.wsu.edu/WorkingPapers/AnaEspinola/WP2011-4.pdf
File Function: First version, 2011
Download Restriction: no

Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2011-4.

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Length: 20 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:wsu:wpaper:espinola-9
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  1. José Moraga-González & Noemi Padrón-Fumero, 2002. "Environmental Policy in a Green Market," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(3), pages 419-447, July.
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