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Atl Econ J (2015) 43:449462
DOI 10.1007/s11293-015-9475-1
Shizuka Nishikawa1
Published online: 26 October 2015# International Atlantic Economic Society 2015
Abstract We construct a model to analyze an oligopoly with two types of technology that produce an undifferentiated product: a cleaner but more expensive technology and a dirtier but less expensive technology. We construct a two-stage model in which firms choose their technology in the first stage and their profit maximizing quantities in the second stage. We then introduce stage zero, in which the government chooses its policy: a lump-sum fee, a specific tax, a subsidy, or a permit to label the product produced with the cleaner technology. We show that the government can achieve the highest social welfare with eco-labeling when most of the consumers are eco-conscious. Otherwise a subsidy or a tax achieves the highest social welfare depending on the degree of environmental damage.
Keywords Cournot oligopoly. Environmental externalities . Tax . Subsidy. Lump-sum fee . Eco-labeling
JEL . H23 . L13 . Q58
Introduction
There are many products which can be produced by various methods with different environmental effects. For example, products can be made in a facility that has a special filter to prevent water pollution. This reduces environmental damage when the product is produced. In other cases the product itself can be made with different environmental effects such as non-toxic detergents. This reduces environmental damage when the
This paper was presented at the 76th International Atlantic Economic Conference, October 1013, 2013, Philadelphia, Pennsylvania. The author is thankful for the valuable comments from the discussant and participants of the conference.
* Shizuka Nishikawa [email protected]
1 St. Marys College of Maryland, St. Marys City, MD, USA
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450 S. Nishikawa
product is used. In either case, producing more environmentally friendly products is more costly. Due to this cost disadvantage, profit-driven firms may not have an incentive to produce environmentally friendly products without government regulation. While some firms may use claims of environmental friendliness as a marketing tool, without government enforcement or certification skeptical consumers may ignore...