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Environmental policy in a linear city model of product differentiation

Published online by Cambridge University Press:  01 March 2012

Ana Espínola-Arredondo  and
Huan Zhao
Ana Espínola-Arredondo
Affiliation:
School of Economic Sciences, Washington State University, 111C Hulbert Hall Pullman, WA 99164, USA. Tel: 509 335 8494. Fax: 509 335 1173. Email: [email protected]
Huan Zhao
Affiliation:
School of Economic Sciences, Washington State University, USA. Email: [email protected]
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Abstract

This paper analyzes how a tax/subsidy policy affects consumers' behavior when choosing between green (pollution-free goods) and conventional products, and its effects on welfare when a proportion of consumers have strong preferences for green goods. We analyze a Hotelling's linear city model where final products by two firms are symmetric in all dimensions except for the externality their production process generates. Our efficiency comparisons suggest that, under a setting of horizontal product differentiation, an environmental regulation (either on polluting firms or consumers buying their products) yields higher social welfare than the absence of policy. Moreover, the proportion of consumers who prefer green products affects the welfare gains from a subsidy or tax policy.

Type
Theory and Applications
Information
Environment and Development Economics , Volume 17 , Issue 4 , August 2012 , pp. 461 - 477
Copyright
Copyright © Cambridge University Press 2012

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