Self-financing Tax/Subsidy Mechanisms in Environmental Regulation with Many Firms

We consider the application of self-financing tax/subsidy mechanisms in environmental regulation and explore the question whether these mechanisms yield strong investment incentives in a market with many firms under Cournot competition. It turns out that the tax/subsidy mechanism with the announcement of the subsidy rate and the tax/subsidy mechanism with the announcement of the tax rate work for an arbitrary number of firms, which means that they yield strong incentives for investing in environmentally friendly technologies. The announcement of the subsidy rate is preferable for solving hold-up problems.

Breitscheidel, Jörg (2005), Self-financing Tax/Subsidy Mechanisms in Environmental Regulation with Many Firms, ZEW Discussion Paper No. 05-87, Mannheim.