Emission Taxation and Investment in Cleaner Production: The Case of Differentiated Duopoly

Ouchida et al. (Cleaner production technology and optimal emission tax, mimeo. 2017) examine the cleaner production technology of the pollution abatement and specify the technology as a log form. They develop the following three-stage game. In the first stage, a government sets a pollution tax rate. In the second stage, duopolistic firms decide its level of abatement investment. In the third stage, the firms engage in Cournot competition in a homogeneous product market. They obtain the explicit solution of the perfect Nash equilibrium of the game. No previous studies have derived the explicit solution of this three-stage game. By incorporating differentiated product markets into the third stage of the game, we generalize Ouchida et al. (Cleaner production technology and optimal emission tax, mimeo. 2017). We derive the explicit equilibrium values of the optimal tax rate, the level of the abatement investment, and the outputs.