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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 Strausz
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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