Network effects and environmental externalities: Do clean technologies suffer from excess inertia?

We study the diffusion of a clean substitute to a dirty durable in a dynamic model. Consumer utility of both durables increases in their respective market shares due to network effects. First, we characterize the optimal dirty good tax. The tax should achieve a long run optimal division of the market between the two goods. Along the transition path to this steady state the optimal tax depends on the current and future market shares of the clean durable. Thus, even if the marginal environmental damage from an additional dirty durable is constant, the optimal tax should not be constant. Second, we study whether excess inertia can occur if the emission tax is not optimally set. We then find that a constant tax that only accounts for the environmental damage caused by the dirty good may lead to excess inertia. Excess inertia could happen even if the clean technology is proprietary, and the technology owner has incentives to sponsor the initial market diffusion of the technology. (C) 2016 Elsevier B.V. All rights reserved.