Paper #335

Title:

The adverse effects of environmental policy in green markets

Authors:

José L. Moraga and Noemí Padrón

Date:

November 1998

Abstract:

We model green markets in which purchasers, either firms or consumers, have higher willingness-to-pay for less polluting goods. The effectiveness of pollution reduction policies is examined in a duopoly setting. We show that duopolists' strategic behaviour may increase pollution levels. Maximum emission standards, commonly used in green markets, improve the environmental features of products. Nonetheless, overall pollution levels will rise because government regulation also affects market shares and boots firms' sales. Consequently, social welfare may be reduced. We also explore the effects of technological subsidies and product charges, including differentiation of charges.

Keywords:

Emission standards, subsidies, product charges, vertically differentiated duopoly

JEL codes:

L52, Q28

Area of Research:

Labour, Public, Development and Health Economics

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