Environmental taxation, market share, and profits in oligopoly

Abstract

Environmental taxation modifies the relative prices of production factors, thus inducing firms to adjust factor demand, production, investment, R&D, and other variables under their control. These price-induced effects are well known in economics. Therefore, it could be argued that economic theory has already provided the analytical tools to assess the impact of environmental taxation on a given industry. As the recent literature has shown, this is not always true.¹ In particular, new problems arise when considering the international dimension of environmental taxation (see Carraro and Siniscalco, 1992). These problems are related to: industry asymmetry across countries, incentive to move capital and/or plants, coordination of environmental policy. Even when transboundary pollution is neglected, trade effects must be accounted for, when analysing environmental taxation (see Conrad’s article in this volume). New problems also arise in a domestic context, when introducing the environment in an endogenous growth model.