Discussion Paper No.2205
Abstract :
Under linear price and cost functions, the optimal environmental pol-
icy is determined for duopolies with product di¤erentiation. In the case
of non-point source pollutants, the standard policies cannot be applied
since the government has limited information about the individual emis-
sion, only the total size of the pollution is known. The …rms’ decisions
are concerned with their outputs and abatement technologies, while the
government chooses the uniform pollution tax rate. The optimal decisions
are determined in a two-stage process. At the second stage, the …rms de-
termine their outputs, taking the technologies and the tax as given. At
the …rst stage, the …rms select abatement technologies with given the tax
rate, and the government selects optimal tax rate with given choices of
the …rms. Under asymmetric information, the government constructs the
welfare function with uncertainty on the …rms’ outputs and determines
the optimal tax rate by maximizing the welfare expectation and mini-
mizing the welfare variance. Since the best reply of the government has
a complicated form, the Nash equilibrium is numerically and graphically
solved. It is shown that the optimal ambient charge tax is less than the
Pigouvian tax. It is also shown that the ambient charge tax e¤ectively
controls the total concentration of NPS pollution.
Keywrods: Emvironmental policy, Ambient charge, NPS pollution,
Two-stage game, Cournot duopoly, Multi-objective optimization