Abstract
This paper considers the combination of pollution taxes and abatement subsidies when some polluting firms procure their abatement goods and services from an oligopolistic eco-industry. The regulator must here cope with two simultaneous price distortions: one that comes from pollution and the other which is caused by the eco-industry’s market power. In this context, we show that taxing emissions while subsidizing polluters’ abatement efforts cannot lead to first-best, but the opposite occurs provided it is the eco-industry’s output which is subsidized. When public transfers also create distortions, welfare can be higher if the regulator uses only an emission tax, but subsidizing abatement suppliers while taxing emissions remains optimal when the eco-industry is concentrated.
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We are grateful to Joan Canton, Henk Folmer, Anthony Heyes, Alain-D販ré Nimubona, and Tom Tietenberg for valuable conversations and insights on this topic. We also acknowledge useful comments and suggestions from Sangeeta Bansal, Brian Copeland, Timo Goeschl, Timothy Swanson, and seminar participants at the Universities of Toulouse 1 and Paris 1, McGill University, HEC Montreal, l’Ecole polytechnique de Paris, University College of London, the EAERE 2005 annual conference in Bremen, and the 2006 World Congress of Environmental and Resource Economists in Kyoto.
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David, M., Sinclair-Desgagné, B. Pollution Abatement Subsidies and the Eco-Industry. Environ Resource Econ 45, 271–282 (2010). https://doi.org/10.1007/s10640-009-9315-3
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DOI: https://doi.org/10.1007/s10640-009-9315-3