Discussion Paper No.2102

Abstract :
This paper shows that, irrespective of whether free entry and exit are allowed or not,there might be a range of moderate degree of pollution emission per unit of goods within which the optimal environment tax rate is higher than the marginal environmental damage, i.e., the optimal tax rate is higher than the “Pigouvian tax rate,” when the pollution function of firms and the social environmental damage function differ in their responses to a pollutant per unit of goods. However, outside the range of pollution emission, the tax rate is lower than the marginal environmental damage.

Keywords : optimal environmental policy, oligopoly, pollution emission function, product differentiation
JEL Classification : H21, H23, L13, Q58