My working papers are available here in Acrobat pdf format. Please do not quote the working papers without the author's permission. Emission Taxes and Standards in a Duopoly Vertically Differentiated in Environmental Quality Abstract Consumers' increased willingness to pay a price premium for greener products stimulates firms to compete in environmental quality. This paper uses a model of vertical product differentiation to study how an emission tax affects environmental quality competition, aggregate emissions, and social welfare. The emission tax increases the product's environmental quality, reduces the degree of differentiation, increases output, and decreases aggregate emissions.
Welfare increases in the emission tax.
An endogenous welfare maximizing emission standard also increases environmental quality, decreases differentiation, and increases output and welfare. Unlike with the tax however, aggregate emissions may either increase or decrease with the standard depending on the unabated level of emissions. This leaves scope for policy intervention. In this paper we examine the use of ad valorem, emission taxes, and a subsidy to consumers buying green. For the purpose we use a duopoly model of vertical product differentiation.