Abstract
This paper investigates the effect of an increase in ambient charges on total pollution in a Bertrand-type duopolistic market. We analyse two distinct models. In the first model, the regulator announces the ambient charge and then both firms set their prices simultaneously. In the second model, after the regulator announces the ambient charge, both firms simultaneously choose their pollution abatement technologies in the first stage and prices in the second stage. An interesting conclusion of this paper is that in both models the strategic interaction between the firms can lead to a “perverse” ambient charge effect on total pollution. That is, an increase in the ambient charge may lead to greater pollution.
Published Version
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