Price-based emissions reduction policies in a polluting managerial duopoly

Abstract

Purpose – This article compares the environmental and welfare effects of three policies in a polluting managerial duopoly with homogeneous goods: an emissions tax, an abatement subsidy and a policy mix of those two instruments. Design/methodology/approach – The article analyzes an emissions reduction policy selection in a managerial duopoly using a game theoretic approach to investigate the strategic interactions among firms and among firms and the government. Findings – The provision of a “green” subsidy that reduces the cost of investing in an end-of-pipe cleaning technology always leads to higher abatement levels than under an emissions tax. Nonetheless, an emissions tax decreases production and, consequently, lowers environmental damage, which has a positive effect on welfare. When societal awareness is negligible and the technology inefficient, the government can nudge the firms’ abatement activities via a “green” subsidies policy, leading in some cases both to the highest welfare and lowest environmental damage. However, when the cleaning technology is adequately efficient, the environmental tax produces the lowest environmental damage. This positive effect counterbalances the negative impact on profits and consumer surplus due to output contraction, leading to the highest social welfare. Research limitations/implications – This is a theoretical article that does not refer to empirical data. However, we formulated some suggestions/insights for empirical analysis. Originality/value – This work studies the impact of optimal emissions reduction policies when firms active on the market are managerial ones, a subject that lags in the literature and provides some policy insights.