Abstract:
This paper examines how product differentiation as well as strategic managerial delegation
affects optimal emission tax rate, environmental damage and social welfare, under
alternative modes of product market competition. It shows that, under pure profit
maximization, the (positive) optimal emission tax rate is not necessarily decreasing in degree
of product differentiation, irrespective of the mode of competition. The possibility of emission
tax rate to be positive and lower for more differentiated products, under quantity (price)
competition, is higher (lower) in case of delegation than that in case of no delegation. It also
shows that, under quantity (price) competition, the equilibrium emission tax rate,
environmental damage and social welfare are higher (lower) in case of delegation than that
in case of no delegation.
