Abstract
We consider an asymmetric Cournot duopoly with firms facing linear Leontief technologies. A pollutant is generated proportional to the quantity of output. The government may regulate the firms by imposing Pigouvian taxes or by issuing a number of tradeable permits. We characterize the optimal tax as well as the optimal permit policy as a function of a critical damage parameter. It turns out that in general neither the social optimum is enforceable, nor is one of the two policies always superior to the other. For a wide range of parameters, however, the permit policy leads to a higher welfare.
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This paper has been written for the most part during a visit to the California Institute of Technology, Pasadena, California. The author would like to express his gratitude to the Division of the Humanities and Social Sciences for its hospitality, to P. Chander, W. Trockel, the participants of seminars at California Institute of Technology, State University of New York at Stony Brook, Purdue University, the universities of Bielefeld, Dortmund, and Mannheim, and two anonymous referees for their helpful comments, and especially to Jeanne Netzley for her TEX-nical support at Caltech. Financial support by the state government of Nordrhein-Westfalen (von Bennigsen-Foerder Preis) is gratefully acknowledged.
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Requate, T. Pollution control in a Cournot duopoly via taxes or permits. Zeitschr. f. Nationalökonomie 58, 255–291 (1993). https://doi.org/10.1007/BF01235250
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DOI: https://doi.org/10.1007/BF01235250