We build an asymmetric duopoly model featuring two polluting firms that are heterogeneous in terms of production efficiency. The less efficient firm performs abatement by buying an environmental good in exchange for a fixed fee, while the more efficient one engages directly in abatement. In this set-up, we compare two environmental policy settings: one where the regulator commits to policy before observing abatement investment, and one where such commitment is not credible (i.e. time consistency). We conclude that, in the latter setting, emission taxes are lower, whilst aggregate profits and consumers’ surplus are enhanced with respect to the case with commitment. The welfare ranking is not straightforward, as commitment may make society better off than under time consistency, depending on the degree of technological asymmetry in production. Moreover, policy makers might be “trapped” in a time-consistent policy scenario, due to the interest of involved stakeholders, at the expense of environmental policy effectiveness.
D'Amato, A., Sestini, R. (2024). Buying or Performing Abatement: Environmental Policy and Welfare When Commitment Is (Not) Credible. ITALIAN ECONOMIC JOURNAL [10.1007/s40797-024-00301-6].
Buying or Performing Abatement: Environmental Policy and Welfare When Commitment Is (Not) Credible
Alessio D'Amato
;
2024-01-01
Abstract
We build an asymmetric duopoly model featuring two polluting firms that are heterogeneous in terms of production efficiency. The less efficient firm performs abatement by buying an environmental good in exchange for a fixed fee, while the more efficient one engages directly in abatement. In this set-up, we compare two environmental policy settings: one where the regulator commits to policy before observing abatement investment, and one where such commitment is not credible (i.e. time consistency). We conclude that, in the latter setting, emission taxes are lower, whilst aggregate profits and consumers’ surplus are enhanced with respect to the case with commitment. The welfare ranking is not straightforward, as commitment may make society better off than under time consistency, depending on the degree of technological asymmetry in production. Moreover, policy makers might be “trapped” in a time-consistent policy scenario, due to the interest of involved stakeholders, at the expense of environmental policy effectiveness.File | Dimensione | Formato | |
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