The Strategic Use of Innovation to Influence Environmental Policy: Taxes versus Standards

This paper evaluates the strategic behavior of a polluting monopolist to influence environmental policy, either with taxes or with standards, comparing two alternative policy games. The first of the games assumes that the regulator commits to an ex-ante level of the policy instrument. The second one...

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Bibliographic Details
Published in:B.E. journal of economic analysis and policy (Online) 2016-04, Vol.16 (2), p.973-1000
Main Authors: Moner-Colonques, Rafael, Rubio, Santiago J.
Format: Article
Language:English
Subjects:
commitment
Emission standards
Environmental policy
Environmental tax
Game theory
innovation
Monopolies
monopoly
Pollution control
Studies
taxes
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Summary:This paper evaluates the strategic behavior of a polluting monopolist to influence environmental policy, either with taxes or with standards, comparing two alternative policy games. The first of the games assumes that the regulator commits to an ex-ante level of the policy instrument. The second one is the time-consistent policy game. We find that the strategic behavior of the firm is welfare improving and leads to more environmental innovation than under regulatory commitment if a tax is used to control pollution. However, the contrary occurs if an emission standard is used. Under commitment, it is shown that both policy instruments are equivalent. We conclude that the optimal environmental policy is to use an emission tax since it yields the same welfare level than an emission standard for a committed regulator yet a larger welfare for a non-committed regulator.
ISSN:2194-6108
1935-1682
DOI:10.1515/bejeap-2015-0009