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Environmental policy in a linear city model of product differentiation

  • Ana Espínola-Arredondo (a1) and Huan Zhao (a2)

This paper analyzes how a tax/subsidy policy affects consumers' behavior when choosing between green (pollution-free goods) and conventional products, and its effects on welfare when a proportion of consumers have strong preferences for green goods. We analyze a Hotelling's linear city model where final products by two firms are symmetric in all dimensions except for the externality their production process generates. Our efficiency comparisons suggest that, under a setting of horizontal product differentiation, an environmental regulation (either on polluting firms or consumers buying their products) yields higher social welfare than the absence of policy. Moreover, the proportion of consumers who prefer green products affects the welfare gains from a subsidy or tax policy.

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S. Bansal and S. Gangopadhyay (2003), ‘Tax/subsidy policies in the presence of environmentally aware consumers’, Journal of Environmental Economics and Management 45(2): 333355.

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H. Cremer and J. Thisse (1999), ‘On the taxation of polluting products in a differentiated industry’, European Economic Review 43(3): 575594.

C. Eriksson (2004), ‘Can green consumerism replace environmental regulation? A differentiated products example’, Resource and Energy Economics 26(3): 281293.

M. Kotchen (2006), ‘Green markets and private provision of public goods’, Journal of Political Economy 114(4): 816834.

J.L. Moraga-Gonzalez and N. Padro-Fumero (2002), ‘Environmental policy in a green market’, Environmental & Resource Economics 22(3): 419447.

I. Parry , R. Williams , and L. Goulder (1999), ‘When can carbon abatement policies increase welfare? The fundamental role of distorted factor markets’, Journal of Environmental Economics and Management 37(1): 5284.

R. Rodriguez-Ibeas (2007), ‘Environmental product differentiation and environmental awareness’, Environmental & Resource Economics 36(2): 237254.

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Environment and Development Economics
  • ISSN: 1355-770X
  • EISSN: 1469-4395
  • URL: /core/journals/environment-and-development-economics
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