Abstract
This paper compares emission taxes with emission reduction subsidies regarding the incentives they create to enhance technology diffusion under imperfect competition. Finns can adopt a technology or a abatement technology. If the clean and dirty products are perfect substitutes, and clean firms face a net absolute advantage over dirty firms, taxes provide the strongest incentive. This ranking is reversed if there is a distortion on output. Subsidies can neutralize this distortion because output supply is stimulated, which would normally be lower than optimal under perfect competition.
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