Regulating a Polluting Oligopoly: Emission Tax or Voluntary Agreement?

16 Pages Posted: 28 Dec 2005

See all articles by Maia David

Maia David

UMR, INRA-INAPG Economie Publique

Abstract

This paper compares, in a polluting oligopoly, an emission tax and a form of environmental policy called voluntary agreement (VA). Here there are two ways of reducing pollution: output contraction and end-of-pipe abatement. Given the imperfect competition, firms' reaction to the tax is sub-optimal. They reduce output excessively in order to raise the price and do not abate enough. The VA is a take-it-or-leave-it contract on abatement effort, offered to the firms with the threat of a tax. It has a limited effect on output and always allows higher abatement than the tax. We find that this kind of VA may be more efficient than the tax in a concentrated industry, when pollution is not too harmful and when the abatement technology is rather efficient and cheap.

Suggested Citation

David, Maia, Regulating a Polluting Oligopoly: Emission Tax or Voluntary Agreement?. Review of Development Economics, Vol. 9, No. 4, pp. 514-529, November 2005. Available at SSRN: https://ssrn.com/abstract=857764 or http://dx.doi.org/10.1111/j.1467-9361.2005.00291.x

Maia David (Contact Author)

UMR, INRA-INAPG Economie Publique ( email )

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