Environmental Tax in a General Oligopoly Equilibrium Model

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Title: Environmental Tax in a General Oligopoly Equilibrium Model
Author: Mäkelä, Minna
Other contributor: Helsingin yliopisto, Valtiotieteellinen tiedekunta, Politiikan ja talouden tutkimuksen laitos
University of Helsinki, Faculty of Social Sciences, Department of Political and Economic Studies
Helsingfors universitet, Statsvetenskapliga fakulteten, Institutionen för politik och ekonomi
Publisher: Helsingin yliopisto
Date: 2019
Language: eng
URI: http://urn.fi/URN:NBN:fi:hulib-201906132830
Thesis level: master's thesis
Discipline: Taloustiede
Abstract: The aim of this paper is to show that increasing trade and having strict environmental policy are not mutually exclusive. I examine how the increase of trade under general oligopolistic equilibrium model affects environmental taxation. In particular, I show that with common assumptions, growth in trade increases environmental taxes. In Neary’s (2015) general oligopolistic equilibrium model, there is a continuum of sectors in which the firms compete in Cournot manner. The firms in each sector are identical, having market power in their own sector, but not at the level of the whole economy. The sectors are otherwise identical, but open sectors trade with a foreign country, while the rest of the sectors are closed. There are two identical countries which I call Home and Foreign. An environmental policy maker has perfect knowledge of the markets and the firms’ behavior. Because there is no abatement technology in the model, the policy maker sets a tax at the first and firms react to it at the second stage. The main result is that with general assumptions, increasing trade leads to increasing environmental tax. When the transaction costs of trade decrease, environmental taxes increase in the closed sectors, but decrease in the open sectors, the less, the larger the proportion of trading sectors in the economy is. When new sectors are opened to trade, then, provided that the share of domestic pollutant and the marginal environmental damage are sufficiently high, environmental taxes increase both in open and closed sectors. The main sources of the study are Neary (2015), which presents the general oligopolistic equilibrium model used in the analysis, and Richter (2015), which constructs strategic environmental policy in that setup.

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