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Second Best Environmental Policies under Uncertainty
Author(s) -
Antoniou Fabio,
Hatzipanayotou Panos,
Koundouri Phoebe
Publication year - 2012
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-78.3.1019
Subject(s) - duopoly , economics , welfare , environmental policy , environmental tax , construct (python library) , environmental standard , microeconomics , control (management) , public economics , tax policy , environmental regulation , environmental economics , tax reform , market economy , programming language , management , computer science , political science , law
We construct a strategic environmental policy model of an international duopoly. Governments use environmental policies, such as an emissions standard or a tax, to control pollution and for rent shifting purposes. Contrary to firms, however, governments are unable to perfectly foresee the actual level of demand and the cost of abatement. Our results suggest that not only the presence but also the absolute level of uncertainty matters for the optimal choice of the environmental policy instrument. Moreover, the optimality conditions under strategic behavior may lead to welfare losses relative to the cooperative outcomes because of under‐regulation and lack of policy coordination between the two countries.