Optimal Environmental Policy for a Polluting Monopoly with Abatement Costs: Taxes Versus Standards

Article
  • 16 Downloads

Abstract

In this paper, we characterize the optimal environmental policy for a polluting monopoly that devotes resources to abatement activities when damages are caused by a stock pollutant. With this aim, we calculate the stagewise feedback Stackelberg equilibrium of a (differential) policy game where the regulator is the leader and the monopolist is the follower. Our analysis shows that the first-best policy consists of applying a Pigouvian tax and a subsidy on production equal to the difference between the price and the marginal revenue. However, for a stock pollutant, the Pigouvian tax is not equal to the marginal damages but is given by the difference between the social and private valuation of the pollution stock. On the other hand, if a second-best emission tax is used, the tax is lower than the Pigouvian tax and the difference decreases with the price elasticity of the demand. Finally, we find that taxes and standards are equivalent in a second-best setting. In the second part of the paper, we solve a linear-quadratic differential game and we obtain that the first-best tax increases with the pollution stock whereas the subsidy decreases. Moreover, the tax is negative for low values of the pollution stock, i.e., for low values of the pollution stock, we obtain that the social valuation of the stock is lower than the private valuation. Furthermore, when a second-best policy is applied, the steady-state pollution stock is lower than the steady-state pollution stock associated with the efficient outcome.

Keywords

Monopoly Abatement Emission tax Emission standard Stock pollutant Differential games 

Notes

Acknowledgments

The authors would like to thank the participants at the IV Encuentro Conjunto Real Sociedad Matemática Española-Sociedad Matemática Mexicana (Valladolid), 23 r d Annual Conference of the European Association of Environmental and Resource Economists (Athens), Singapore Economic Review Conference 2017, Second AERNA Workshop on Game Theory and the Environment (Madrid), XXXII Jornadas de Economía Industrial (Pamplona), 19 t h Annual BIOECON Conference (Tilburg), 17 t h International Symposium on Dynamic Games and Applications, and one anonymous referee for their helpful comments. Usual caveats apply.

References

  1. 1.
    Barnett, A.H. (1980). The Pigouvian tax rule under monopoly. American Economic Review, 70, 1037–1041.Google Scholar
  2. 2.
    Benchekroun, H., & Van Long, N. (1998). Efficiency-inducing taxation for polluting oligopolists. Journal of Public Economics, 70, 325–342.CrossRefGoogle Scholar
  3. 3.
    Benchekroun, H., & Van Long, N. (2002). On the multiplicity of efficiency-inducing tax rules. Economic Letters, 76, 331–336.CrossRefGoogle Scholar
  4. 4.
    Bergstrom, T.C., Gross, J.G., Porter, R.C. (1981). Efficiency-inducing taxation for a monopolistically supplied depletable resource. Journal of Public Economics, 15, 23–32.CrossRefGoogle Scholar
  5. 5.
    Buchanan, J.M. (1969). External diseconomies, corrective taxes, and market structure. American Economic Review, 59, 174–177.Google Scholar
  6. 6.
    Feenstra, T., Kort, P.M., de Zeeuw, A. (2001). Environmental policy instruments in an international duopoly with feedback investment strategies. Journal of Economic Dynamics & Control, 25, 1665–1687.CrossRefGoogle Scholar
  7. 7.
    Golombek, R., Greaker, M., Hoel, M. (2010). Carbon taxes and innovation without commitment. B.E. Journal of Economic Analysis and Policy, 10(1), 1935–1682.CrossRefGoogle Scholar
  8. 8.
    Hoel, M., & Karp, L. (2001). Taxes versus quotas for a stock pollutant with multiplicative uncertainty. Journal of Public Economics, 82, 91–114.CrossRefGoogle Scholar
  9. 9.
    Hoel, M., & Karp, L. (2002). Taxes versus quotas for a stock pollutant. Resource and Energy Economics, 24, 367–384.CrossRefGoogle Scholar
  10. 10.
    Karp, L. (1992). Efficiency inducing tax for a common property oligopoly. Economic Journal, 102, 321–332.CrossRefGoogle Scholar
  11. 11.
    Karp, L., & Livernois, J. (1992). On efficiency-inducing taxation for a non-renewable resource monopolist. Journal of Public Economics, 49, 219–239.CrossRefGoogle Scholar
  12. 12.
    Karp, L., & Zhang, J. (2005). Regulation of stock externalities with correlated abatement costs. Environmental and Resource Economics, 32, 273–299.CrossRefGoogle Scholar
  13. 13.
    Karp, L., & Zhang, J. (2006). Regulation with anticipated learning about environmental damages. Journal of Environmental Economics and Management, 51, 259–279.CrossRefGoogle Scholar
  14. 14.
    Karp, L., & Zhang, J. (2012). Taxes versus quantities for a stock pollutant with endogenous abatement costs and asymmetric information. Economic Theory, 49, 371–409.CrossRefGoogle Scholar
  15. 15.
    Kort, P.M. (1996). Pollution control and the dynamics of the firm: the effects of market-based instruments on optimal firm investments. Optimal Control Applications & Methods, 17, 267–279.CrossRefGoogle Scholar
  16. 16.
    Kydland, F.E., & Prescott, E.C. (1977). Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy, 85, 473–492.CrossRefGoogle Scholar
  17. 17.
    Masoudi, N., & Zaccour, G. (2014). Emissions control policies under uncertainty and rational learning in a linear-state dynamic model. Automatica, 50, 719–726.CrossRefGoogle Scholar
  18. 18.
    Martín-Herrán, G., & Rubio, S.J. (2016). The strategic use of abatement by a polluting monopoly. FEEM Nota di Lavoro, 58.2016.Google Scholar
  19. 19.
    Petrakis, E., & Xepapadeas, A. (2003). Location decisions of a polluting firm and the time consistency of environmental policy. Resource and Energy Economics, 25, 197–214.CrossRefGoogle Scholar
  20. 20.
    Poyago-Theotoky, J., & Teerasuwannajak, K. (2002). The timing of environmental policy: a note on the role of product differentiation. Journal of Regulatory Economics, 21, 305–316.CrossRefGoogle Scholar
  21. 21.
    Saltari, E., & Travaglini, G. (2011). The effects of environmental policies on the abatement investment decisions of a green firm. Resource and Energy Economics, 33, 666–685.CrossRefGoogle Scholar
  22. 22.
    Stimming, M. (1999). Capital-accumulation games under environmental regulation and duopolistic competition. Journal of Economics, 69, 267–287.CrossRefGoogle Scholar
  23. 23.
    Weitzman, M. (1974). Prices versus quantities. Review of Economic Studies, 41, 477–491.CrossRefGoogle Scholar
  24. 24.
    Wirl, F. (2014). Taxes versus permits as incentive for the intertemporal supply of a clean technology by a monopoly. Resource and Energy Economics, 36, 248–269.CrossRefGoogle Scholar
  25. 25.
    Xepapadeas, A.P. (1992). Environmental policy, adjustment costs, and behavior of the firm. Journal of Environmental Economics and Management, 23, 258–275.CrossRefGoogle Scholar
  26. 26.
    Yanase, A. (2009). Global environment and dynamic games of environmental policy in an international duopoly. Journal of Economics, 97, 121–140.CrossRefGoogle Scholar

Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Applied Economics and IMUVaUniversity of ValladolidValladolidSpain
  2. 2.Department of Economic Analysis and ERI-CESUniversity of ValenciaValenciaSpain

Personalised recommendations