Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/90745 
Year of Publication: 
2013
Series/Report no.: 
Memorandum No. 15/2013
Publisher: 
University of Oslo, Department of Economics, Oslo
Abstract: 
Network externalities could be present for many low or zero emission technologies. One obvious example is alternative fuel cars, whose use value depends on the network of service stations. The literature has only briefy looked at environmentally benefcial technologies. Yet, the general literature on network effects is mixed on whether governments need to intervene in order to correct for network externalities. In this paper we study implications of network effects on environmental policy in a discrete time dynamic game. Firms sell a durable good. One type of durable is causing pollution when being used, while the other type is clean. Consumers' utility increase in the number of other users of the same type of durable, which gives rise to the network effect. We find that the optimal tax depends on the size of the clean network. If starting from a situation in which the dirty network dominates, the optimal tax may exceed the marginal environmental damage, thereby charging consumers for more than just their own emissions. Applying a Pigovian tax may, on the contrary, fail to introduce a socially beneficial clean network.
Subjects: 
Network effects
lock-in
enviromnetal taxes
JEL: 
Q55
Q58
H23
Document Type: 
Working Paper

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