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Permits or Taxes? How to Regulate Cournot Duopoly with Polluting Firms

Requate, Till (1992) Permits or Taxes? How to Regulate Cournot Duopoly with Polluting Firms. Social Science Working Paper, 792. California Institute of Technology , Pasadena, CA. (Unpublished)

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The paper investigates pollution control of firms engaging in imperfect competition. We consider asymmetric Cournot duopoly where firms have linear technologies. Welfare is assumed to be separable in consumers' surplus and social damage which is given by a convex function depending on the aggregate pollution level. After deriving social optimum, we give a complete characterization of the optimal linear tax as well as of the optimal number of permits taking into account the firms' strategic behavior, and then compare the two both policies with respect to welfare. None of them turns out to implement social optimum in general. Also, no policy can be said to be superior, for all parameters. However, for a considerable range of parameters giving out permits yields a higher welfare than taxes. Finally, we consider double taxation of output and pollutants. In this case social optimum can always be achieved, if there are only two firms.

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Additional Information:This paper has been written for the most part during a visit to California Institute of Technology, Pasadena, California. The author would like to express his gratitude to the Division of the Humanities and Social Sciences for its hospitality, to P. Chander and the participants of seminars in Pasadena and Bielefeld for their helpful comments, and especially to Jeanne Netzley for her technical support. Published as Requate, Till. "Permit or taxes? How to regulate Cournot Duopoly with polluting firms." Biblioteka Ekonomia i Środowisko 11 (1993): 29-57.
Group:Social Science Working Papers
Series Name:Social Science Working Paper
Issue or Number:792
Record Number:CaltechAUTHORS:20170829-153257189
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80928
Deposited By: Jacquelyn Bussone
Deposited On:30 Aug 2017 17:10
Last Modified:03 Oct 2019 18:36

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