Tax and pollution in a vertically differentiated duopoly: When consumers matter

Abstract

Inspired by the so-called polluter pays principle, environmental taxes can drive a more sustainable European market. However, unilateral mitigation measures can reduce the competitiveness of carbon-intensive industries, thereby inducing relocation. In this paper, we wonder whether a tax can effectively curb emissions without hurting firms. Our analysis's entry point is that the level of emissions in a region is jointly determined by (i) the number of consumers buying dirty goods and (ii) the environmental quality of these products. Thus, to curb emissions, on the one hand, firms have to reduce their goods' emissions intensity. On the other hand, consumers have to reduce the consumption of dirtier goods. This leads to defining a tax depending on the number of consumers buying the brown products and the relative quality of these products. We show that under this tax, lower emissions do not come at the expense of lower profits.

Endogenous subsidies for cleaner products: The role of ecofriendly consumers

“…In a companion paper, Ceccantoni et al (2023) showed that, contrary to common wisdom, a carbon tax does not always hurt consumers. In a vertically differentiated duopoly, they analyze a tax determined by the quality gap between variants and the demand for a dirtier product.…”

“…To the best of our knowledge, only Ceccantoni et al (2023) point out that the impact of a fiscal measure on market equilibrium, when it is endogenously determined, may change with its recipient. Close in spirit to this contribution, we depart from it in two main respects.…”

Vertical shareholding, vertical product differentiation and social welfare

“…Same as Wang (2021b, 2022) As the difference in product quality, consumers in the market will make different choices according to the utility maximization, that is, some consumers choose to buy high-quality products, some consumers choose to buy low-quality products, and the rest choose not to buy products. Same as Hattori and Tanaka (2018) and Ceccantoni et al (2022), we assume that each consumer buys at most one unit of the product. There are two marginal consumers in the market, 𝐴𝐴 𝐴𝐴 and 𝐴𝐴 𝐴𝐴 .…”

“…Same as Hattori and Tanaka (2018) and Ceccantoni et al. (2022), we assume that each consumer buys at most one unit of the product. There are two marginal consumers in the market, $$z$$ and $$y$$.…”