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  • Zhe Li (a1) and Shouyong Shi (a2)

We incorporate emission into a general equilibrium model with rich dispersion in productivity among monopolistically competitive plants. Emission is modeled as a by-product of goods production. An abatement technology is available to the plants for reducing emission. We compare an emission tax with an emission intensity standard. The tax is shown to dominate the standard in welfare for all values of market power if either productivity is sufficiently dispersed or the abatement technology is not effective. On the other hand, if productivity dispersion is small and the abatement technology is effective, there exists sufficiently strong market power so that the standard will dominate the tax in welfare. Even in the case where the standard unambiguously induces a higher output of dirty goods than the tax, the general equilibrium framework is necessary for ranking the two policies in welfare.

Corresponding author
Address correspondence to: Zhe Li, School of Economics and Key Laboratory of Mathematical Economics, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China; e-mail:
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We are grateful to three referees and an associate editor for valuable comments. An earlier version of this paper has been circulated under the title “Emission Tax or Standard: The Roles of Productivity Dispersion and Abatement.” We have received useful comments from the participants of the Society for Economic Dynamics meeting (2010), the World Congress of the Econometric Society (2010), the Midwest Macro Conference (2010), and the Shanghai Macro Workshop (2010). Li would like to acknowledge financial support by the Shanghai Pujiang Program and the National Science Foundation of China (71203127). Shi would like to acknowledge financial support from the Canada Research Chair, the Bank of Canada Fellowship, the Social Sciences and Humanities Research Council of Canada, and the Pennsylvania State University. The opinions expressed here are the authors' own and do not reflect the views of the Bank of Canada.

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Macroeconomic Dynamics
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