Environmental taxation: The impact of carbon tax policy commitment on technology choice and social welfare
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Date
2020-12-17
Authors
Rustico, Erica
Journal Title
Journal ISSN
Volume Title
Publisher
University of Waterloo
Abstract
Motivated by multiple real-world settings, we determine a social welfare-maximizing regulator’s tax policies that induce a profit-maximizing polluting firm to make green technology choices. Using a game-theoretic approach we compare the optimal tax and social welfare over two periods under two scenarios: (1) a regulator committing to a tax level for both periods at the beginning of the first period; (2) a regulator who sets the same tax at the beginning of each period without disclosing this information to the firm (i.e. the firm is not aware of the second period tax in the first period). We find that regulators can achieve a higher social welfare when two-period commitments are made. Moreover, the outcomes in the commitment policy are less sensitive to small deviations in the optimal tax level.
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Keywords
environmental taxes, sustainability, policy commitment, green technologies, environmental policy, game theory