Environmental Taxation and Strategic Commitment in Duopoly Models

In this paper, we address the issue of optimal environmental taxation under imperfect competition. The problem is analysed for three different types of duopoly models, the Cournot open and closed loop models, and the Stackelberg model.

We explicitly analyse the role of strategic behaviour. Each firm has to make a choice of output level and of the level of a strategic variable. The choice of this strategic variable affects both marginal cost and emissions. We compare the properties of these three duopoly models, and derive and compare optimal environmental taxes. We show that whether the optimal tax is lower or higher than marginal environmental costs depends on the information transmission and the effect of the strategic variable on marginal costs. In addition, the differences in market shares, and the influence of the tax on the cost structure play important roles, in determining optimal emission taxes.