Induced vs. Voluntary Green Production: Which Is Better for Society?

Abstract

This article studies the environmental and societal impacts of a polluting monopoly when a society strives for a clean environment. Two scenarios are considered: (1) the government levies an environmental tax to induce investment in emission-reducing technology, and (2) the monopolist engages in environmental corporate social responsibility (CSR). It is shown that taxation has a lower environmental impact, but the monopolist undertakes CSR activities only if the abatement technology is efficient. Social welfare is always higher under CSR; therefore, when the technology is not adequately efficient, the government should implement a second-best environmental tax policy to avoid the worst welfare outcome.