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Optimal Environmental Policy with Network Effects: Will Pigovian Taxation Lead to Excess Inertia?

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  • Mads Greaker
  • Kristoffer Midttømme

Abstract

We study a dynamic model with two competing durable goods; one dirty, the other clean. Due to network effects a consumer who adopts the dirty good today will increase the incentive future consumers have to adopt the dirty good. Thus, a consumer who chooses the dirty good, in a sense causes more pollution than just his own. This “externality multiplier effect” may warrant a dirty good tax in excess of the Pigovian tax. If this is not acknowledged, the market may stay with the dirty good even if it is socially beneficial to shift to the clean good.

Suggested Citation

  • Mads Greaker & Kristoffer Midttømme, 2014. "Optimal Environmental Policy with Network Effects: Will Pigovian Taxation Lead to Excess Inertia?," CESifo Working Paper Series 4759, CESifo.
    • Handle: RePEc:ces:ceswps:_4759
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Greaker, Mads & Midttømme, Kristoffer, 2016. "Network effects and environmental externalities: Do clean technologies suffer from excess inertia?," Journal of Public Economics, Elsevier, vol. 143(C), pages 27-38.
    2. Geir H. M. Bjertnaes, 2017. "The Efficient Combination of Taxes on Fuel and Vehicles," CESifo Working Paper Series 6789, CESifo.
    3. Geir H. M. Bjertnæs, 2017. "The efficient combination of taxes on fuel and vehicles," Discussion Papers 867, Statistics Norway, Research Department.
    4. Charu Grover & Sangeeta Bansal, 2021. "Effect of green network and emission tax on consumer choice under discrete continuous framework," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 23(4), pages 641-666, October.
    5. Geir H. M. Bjertnæs, 2021. "Taxation of fuel and vehicles when emissions are constrained," Discussion Papers 949, Statistics Norway, Research Department.

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    More about this item

    Keywords

    network effects; excess inertia; environmental taxes;
    All these keywords.

    JEL classification:

    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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