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Strategic environmental policy and the accumulation of knowledge

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  • Ziesemer, Thomas
  • Michaelis, Peter
Abstract
In dealing with a transnational pollutant-emitting duopoly welfare-maximising policy makers face two negative externalities: imperfect competition and unpriced emissions. Strategic environmental policy models show that these externalities involve a trade-off between reducing pollution and allowing for rent-seeking of the respective firm. This dilemma usually results in a suboptimal internalisation of the negative externality emerging from emissions. Indeed, the conventional model setup includes an R&D stage that enables the firms to mitigate regulation costs. But the typical one period configuration ignores that R&D expenditures create knowledge capital which is, due to its inherent cumulativeness, also effective in following periods. Our model analyses the established trade-off in a two period setting and therefore allows for an investigation of intertemporal knowledge accumulation. We find that the intertemporal effects provide an incentive for a policy maker to set a higher tax rate compared to a one-period setup which lessens the magnitude of the suboptimal internalisation of emissions. Under certain conditions even a tax rate above the Pigouvian level is possible in period 1.

Suggested Citation

  • Ziesemer, Thomas & Michaelis, Peter, 2011. "Strategic environmental policy and the accumulation of knowledge," Structural Change and Economic Dynamics, Elsevier, vol. 22(2), pages 180-191, June.
    • Handle: RePEc:eee:streco:v:22:y:2011:i:2:p:180-191
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    References listed on IDEAS

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