The switching effect of environmental taxation within Bertrand differentiated duopoly

Kurtyka, Oliwia and Mahenc, Philippe (2011) The switching effect of environmental taxation within Bertrand differentiated duopoly. Journal of Environmental Economics and Management, 62 (2). 267–277. ISSN 0095-0696

Abstract

We investigate second-best optimal taxation of the polluting variety of a product in a Bertrand duopoly with differentiated varieties. The analysis provides novel insight on a useful social function of environmental regulation. Besides internalizing the environmental externality, the taxation of the polluting variety improves the matching of consumers and product varieties, and so creates a socially desirable business switching between the differentiated varieties.