Environmental protection without loss of international competitiveness

Abstract

We develop a two‐country Cournot oligopoly model with product differentiation across countries and production‐generated pollution. The abatement of pollution by the firms in response to emission taxes is endogenous, and the number of firms can be fixed or there may be free entry and exit of firms in both countries. We propose particular unilateral and multilateral piecemeal policy reforms of emission taxes and production subsidies such that domestic industries will not suffer any loss of international competitiveness (defined in terms of either market share or profits), emission levels will be lower, and welfare could be higher in both countries.

Environmental quality and monopoly pricing

“…Naturally, the more intuitive situation is the one where a higher quality is associated with a higher price, and this is the scenario that is predicated on a very general assumption on the demand function, just as in the reverse problem. 19 Due to this symmetry between the two single-decision problems, we also have the following analog of Corollary 3. an increase in the dispersion of consumers' valuations rotates the demand curve clockwise (Pqa > 0). The impact of these clockwise rotations on the monopolist's behavior has been thoroughly studied by Johnson and Myatt (2016).…”

“…Bosi, Desmarchelier and Ragot (2019), while a trade-theoretic one is given by Lahiri and Symeonidis (2017). We shall discuss the detailed connection of our work to Ebert and von dem Hagen (1998) later on.…”

“…It turns out that this problem satisfies analogous properties as the reverse one. Indeed, since the condition of log supermodularity of demand treats the price and quality variables symmetrically, Propositions 2 and 10 also imply that, treating price as a parameter and quality as the decision variable, the monopolist will choose an optimal quality that is increasing in price if condition (6) or (7) holds, but instead decreasing in the price if condition (19) or (20) holds. Naturally, the more intuitive situation is the one where a higher quality is associated with a higher price, and this is the scenario that is predicated on a very general assumption on the demand function, just as in the reverse problem.…”

Is emission intensity or output U‐shaped in the strictness of environmental policy?

“…4 In a free-entry Cournot oligopoly model with constant marginal production cost and an integrated abatement technology, Ulph (1997) derives conditions under which an increase in the tax rate reduces output, finding that the effect of the tax rate on environmental R&D is ambiguous. Katsoulacos and 1 By contrast, an end-of-pipe technology allows for the reduction of emissions by an absolute amount (e.g., Endres & Friehe, 2013;Lahiri & Symeonidis, 2017;Menezes & Pereira, 2017;Requate, 2005). Solving our model with an end-of-pipe technology, we find that both emission intensity and output are decreasing in the strictness of the policy.…”

“…By contrast, an end‐of‐pipe technology allows for the reduction of emissions by an absolute amount (e.g., Endres & Friehe, ; Lahiri & Symeonidis, ; Menezes & Pereira, ; Requate, ). Solving our model with an end‐of‐pipe technology, we find that both emission intensity and output are decreasing in the strictness of the policy.…”