Abstract
This paper establishes a symmetric two-country model with vertically related
markets. In the downstream market, there is one firm in each country selling a
homogeneous good, whose production generates pollution, to its home and the
foreign markets a la Brander (1981). In the intermediate good market, there is
also one upstream firm in each country, supplying the intermediate good only
to its own country’s downstream market. The upstream firms can choose
either price or quantity to maximize their profits. With this setting, the paper
examines the optimal environmental policy and how it is affected by the tariff
on the final good. It is found that, under free trade, the optimal final-good
output with imperfect intermediate-good market will have the same output
level as that with perfect intermediate-good market after imposing the optimal
emission tax. The optimal environmental tax is smaller and the optimal
environmental policy is less likely to be a green strategy under trade
liberalization if the market structure in the intermediate good market is
imperfect than perfect competition. On the other hand, the optimal
environmental tax is necessarily higher if the upstream firm chooses price
than quantity. Moreover, the optimal environmental policy is less likely to be a
green strategy under trade liberalization if the upstream firms choose quantity
than price to maximize their profits.
YAN-SHU LIN. (2012) ADE LIBERALIZATION AND OPTIMAL ENVIRONMENTAL POLICIES IN VERTICAL RELATED MARKETS, Paradigms , Vol 6 , Issue 1.
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