Environmental Policies in a Polluting Duopoly: A Simple Comparison

In a polluting Cournot duopoly with homogeneous goods, this work compares the environmental, public finance and welfare impacts of three policies: an emissions tax, an abatement subsidy, and a policy mix. A subsidy, alone or coupled with a tax, always increases abatement; however, taxation disincentivises production, leading to decreased environmental damage, which positively affects welfare. Except for a rather inefficient technology, the emissions tax produces the lowest environmental damage; this positive effect, jointly with the tax revenues the government collects, more than offsets the negative impact on profits and consumer surplus due to output contraction, leading to the highest welfare. Only when societal awareness is negligible and technology is inefficient does the government design a policy providing a subsidy.