On the Detrimental Effects of Concave Emission Charges in a Dynamic Cournot Duopoly Model

We reconsider the dynamic Cournot duopoly framework with homogeneous goods by Mamada and Perrings (2020), in order to highlight the richness in its outcomes. In the model, each firm is taxed proportionally to its own emission only and charge functions are quadratic. While Mamada and Perrings (2020) focus on the case of convex, and partially on the case of concave, charge functions, we show that by completing the analysis for concave functions it may happen that, with the rise in the emission charges, the equilibrium production levels for the two firms, which are directly proportional to their emissions, increase, both with homogeneous and with differentiated products. This highlights that even in the absence of free-riding possibilities, too soft environmental policies can produce detrimental effects on the pollution level, and thus the choice of the mechanism to implement has to be carefully pondered.