Abstract
This paper investigates the consumption tax and subsidy as an environmental policy instrument for environmentally aware consumers by applying the model of price discrimination. We discover that a higher rate of subsidy should be set for less eco-friendly consumers for the purpose of achieving socially optimal environmental qualities under positive externalities and this retrogressive subsidization differs from the current progressive subsidization in the Japanese automobile industry, and could alleviate crowding out effects on prosocial behavior. Moreover, it is revealed that the optimal policy instrument for eco-friendlier consumers shifts from a subsidy to a tax, as the level of negative externalities increases.
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