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Regulation of a duopoly and environmental R&D

Ben Youssef, Slim and Dinar, Zeineb (2009): Regulation of a duopoly and environmental R&D.

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Abstract

We develop a three stage game model composed of a regulator and two firms. These firms compete on the same market where they offer the same homogeneous good, and can invest in R&D to lower their emission/output ratio. By means of a tax per-unit of pollution and a subsidy per-unit of R&D level, the regulator can induce the first best outcome. Interestingly, the investment in R&D is actually taxed when the marginal damage cost of pollution is high enough, because firms are tempted to overinvest in research.

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