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Emission Taxes and Optimal Refunding Schemes with Endogenous Market Structure

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The purpose of this paper is to investigate optimal schemes for refunding the emission tax in a free-entry market where the production process generates emissions. We consider the regulation by a three-part tax policy: the government sets an emission tax, a refunding scheme, and an entry-license tax. In contrast to the case of the two-part tax-refund policy under no entry, we show that even if it is impossible to obtain subsidies from outside, the first-best outcome is always attained. Further, the government’s budget constraint is binding under the optimal schemes. Our result implies that the tax-refund system works effectively in a market with endogenous entry.

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Correspondence to Susumu Cato.

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I am grateful to Katsuhito Iwai and Toshihiro Matsumura for their helpful discussions and suggestions. I thank anonymous referees for constructive and valuable comments. Needless to say, I am responsible for any remaining errors. This paper is financially supported by Grant-in-Aids for Young Scientists (Start-up) from the Japan Society for the Promotion of Science and the Ministry of Education, Culture, Sports, Science and Technology.

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Cato, S. Emission Taxes and Optimal Refunding Schemes with Endogenous Market Structure. Environ Resource Econ 46, 275–280 (2010).

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