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Environmental and Resource Economics

, Volume 67, Issue 4, pp 925–940 | Cite as

Feed-in Subsidies, Taxation, and Inefficient Entry

  • Fabio Antoniou
  • Roland StrauszEmail author
Article

Abstract

We study (energy) markets with dirty production and lumpy entry costs of clean production (renewables). For intermediate entry costs, markets yield inefficient production and inefficient entry. A mix of three popular regulatory instruments—polluter taxation, feed-in subsidies for renewables, and consumption taxation—cannot correct these market failures for larger entry costs. The instruments are imperfect because they affect marginal incentives, whereas entry is a lumpy fixed cost problem. Whenever the first best is implementable, feed-in subsidies and consumption taxes are redundant. The second best requires feed-in subsidies or consumption taxes in addition to a pollution tax and overshoots first best levels. Given production levels, the instruments do not affect the regulator’s budget.

Keywords

Taxation Feed-in tariffs Externalities Renewables Entry Pollution 

JEL Classification

D21 D61 H23 

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Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  1. 1.Institute for Economic Theory 1Humboldt-Universität zu BerlinBerlinGermany

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