Regulation of a duopoly and environmental R&D

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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Duopoly; Emission tax; R&D subsidy; First best.
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; D - Microeconomics > D6 - Welfare Economics > D62 - Externalities; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C72 - Noncooperative Games

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