RT info:eu-repo/semantics/article
T1 Second-best taxation for a polluting monopoly with abatement investment
A1 Martín Herrán, Guiomar
A1 Rubio, Santiago
AB This paper characterizes the optimal tax rule to regulate a pollutingmonopoly when the firm has the possibility of investing in an abatementtechnology and the environmental damages are caused by a stock pollutant.The optimal policy is given by the stagewise feedback Stackelbergequilibrium of a dynamic policy game between a regulator and a monopolist.The regulator playing as the leader chooses an emission tax to maximize netsocial welfare, and the monopolist acting as the follower selects the outputand the investment in abatement technology to maximize profits. We find thatthe optimal tax has two components. The first component is negative andequal to the gap between the marginal revenue and the price caused by thefirm market power; the second component is given by the difference betweenthe social and private shadow prices of the pollution stock. Considering alinear-quadratic model we show that if marginal environmental damages areconstant, the difference between social and private shadow prices ispositive and the optimal policy consists of taxing emissions at a constantrate if the marginal damages are large enough. However, if the marginalenvironmental damages are increasing the numerical exercises carried outshow that this difference is negative at the steady state and the optimalpolicy gives the firm a subsidy when approaching the steady state regardlessof the importance of the environmental damages. This result is explained bythe negative effect that abatement technology accumulation has on the tax.Finally, it can be pointed out that although both models yield differentpredictions about the sign of the optimal policy the dynamics is globallystable for both cases.
YR 2018
FD 2018
LK http://uvadoc.uva.es/handle/10324/31975
UL http://uvadoc.uva.es/handle/10324/31975
LA eng
NO Energy Economics 2018, 73, 178-193
DS UVaDOC
RD 22-nov-2024