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Carbon tax vs. emission trading in a monopolistically competitive market with heterogeneous firms

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  • Kefu Lin

    (Tokai University)

  • Rui Pan

    (Tohoku University)

  • Dao-Zhi Zeng

    (Tohoku University)

Abstract

We establish a general-equilibrium model to compare the efficiency of two emission regulation policies used worldwide: the carbon tax (CT) and the emission trading scheme (ETS). Assuming monopolistic competition and heterogeneous firms, we show that the ETS is better in an economy with a high degree of heterogeneity, and the CT is better otherwise. We also explore how the market distortions under these two regulation policies are different. Moreover, we find that the excessive input of an immobile resource in manufacturing production may result in market inefficiency.

Suggested Citation

  • Kefu Lin & Rui Pan & Dao-Zhi Zeng, 2024. "Carbon tax vs. emission trading in a monopolistically competitive market with heterogeneous firms," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 73(2), pages 825-848, August.
    • Handle: RePEc:spr:anresc:v:73:y:2024:i:2:d:10.1007_s00168-023-01249-8
    DOI: 10.1007/s00168-023-01249-8
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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