The switching effect of environmental taxation within Bertrand differentiated duopoly

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By CEE-M

We investigate second-best optimal taxation of the polluting variety of a product in a Bertrand duopoly with differentiated varieties. The analysis provides novel insight on a useful social function of environmental regulation. Besides internalizing the environmental externality, the taxation of the polluting variety improves the matching of consumers and product varieties, and so creates a socially desirable business switching between the differentiated varieties. (C) 2011 Elsevier Inc. All rights reserved.