Upstream and downstream pollution taxations in vertically related markets with imperfect competition |
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Authors: | Hajime Sugeta Shigeru Matsumoto |
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Institution: | (1) Department of Economics, Kansai University, 3-3-35 Yamate-cho, Suita-shi, Osaka-fu 564-8680, Japan |
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Abstract: | When two markets are vertically related, the government can control pollution at the upstream as well as the downstream market
levels. This paper employs the stylized model of input price discrimination and compares the effectiveness of upstream and
downstream pollution taxations. We consider the situation in which downstream firms have heterogeneous abatement technologies
and an upstream monopolist performs input price discrimination against them. In order to mitigate pollution, the government
imposes input tax on the intermediate inputs and emission tax on the pollutant. We show that the degree of input price discrimination
decreases with a rise in the input tax and increases with a rise in the emission tax. We further examine the effect of a green
tax reform in which the government changes the source of taxation from input tax to emission tax. We argue that although this
green tax reform may reduce the tax revenue of the government, it will certainly increase social welfare.
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Keywords: | Input price discrimination Abatement heterogeneity Pollution taxation Green tax reform |
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