Abstract
Given a duopoly of firms that produce differentiated outputs maximizing profits and emitting pollution, this paper introduces an emission charge as an environmental policy and analyses its static and dynamic effects on emission reductions. Among other results, it is shown that the emission charge effectively controls the aggregate emission level. Although increasing an emission charge could increase the individual emissions, it is also shown that such adverse response is limited to the case where the own-market size elasticity is larger than the cross-market size elasticity in absolute value. From a dynamic point of view, it is demonstrated that the emission charge has double stabilizing effects; increasing the charge is, first, to enlarge the stability region and second, to stabilize unstable oscillations through a period-halving bifurcation.
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