Monopoly Emission Taxation and Compliance when Consumers are Green

Research output: Working paperDiscussion paper

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DatePublished - 2018
Original languageEnglish

Abstract

This paper examines how a monopolist’s production and emission decisions and its incentives to evade emission taxes are affected by the degree of consumers’ environmental awareness. Producing a low-emission eco-friendly product is costly for the monopolist with the marginal production cost being an inverse function of the level of emission. Consumers cannot verify the environmental attributes of the product (except for reading the labels!). Heterogeneous
consumers are characterised by an environmental awareness parameter proportional to the emission level that is distributed uniformly over a certain range. In this framework, we find several strong results. First, regardless of any emission taxes, the monopoly emission level declines and approaches the social optimal as consumers become more environmentally conscious although
green consumerism alone cannot guarantee the socially-optimal level of emission. Second, even with a perfectly observable emission level, the (2nd best) optimal tax can be higher, equal or lower than the Pigouvian tax (in contrast to Barnett (1980)) depending upon the degree of consumers’ awareness. Third, the higher the degree of awareness, stronger is the deterrent effect of audit
strategies on the monopolist’s incentives for tax evasion. A strong policy implication emerges from our analysis: given the government’s budget constraint, resources should be allocated to promoting environmental awareness rather than to costly auditing. JEL codes: D42; H23; H26; L12

    Research areas

  • Emission taxation, enviromentally-friendly consumers, monopoly, auditing

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