Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211174 
Year of Publication: 
2019
Series/Report no.: 
Working Paper No. 015.2019
Publisher: 
Fondazione Eni Enrico Mattei (FEEM), Milano
Abstract: 
The paper studies the use of emission taxes and feed-in subsidies for the regulation of a monopoly that can produce the same good with a technology that employs a polluting input and a clean technology. The second-best tax and subsidy are calculated solving a two-stage policy game between the regulator and the monopoly with the regulator acting as the leader of the game. We find that the second-best tax rate is the Pigouvian tax. The tax implements the efficient level of the dirty output but does not affect the total output. On the other hand, the subsidy leads to the monopoly to reduce the dirty output but also to increase the total output. This increase in total output may yield a larger net social welfare when the subsidy is used provided that the marginal cost of clean output is not very high, as a linear-quadratic specification of the model confirms. Finally, it is showed that the combination of an emission tax with a feed-in subsidy induces the firm to choose the efficient outputs, but in this case the first-best tax must be lower than the Pigouvian tax. Thus, the findings of this paper support the idea that feed-in subsidies open the possibility for improving the regulation of a polluting firm with market power.
Subjects: 
Monopoly
Polluting Inputs
Clean Technology
Production-mix
Emission Tax
Feed-in Subsidy
JEL: 
D42
H23
L12
Q58
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.