The Welfare Effects of Environmental Taxation on a Green Market Where Consumers Emit a Pollutant

This paper examines the welfare impact of emission taxes and subsidies in a green market where consumers emit a pollutant through their usage of products produced by duopolists. For this purpose, we employ a discrete-continuous model including both consumer choice and usage of an environmentally differentiated product in a utility-consistent framework. The findings indicate that an emission tax is always welfare dominant over a subsidy on consumer purchases of the clean product because of its contribution to a reduction in environmental damage. It does this by both inducing firms to improve the environmental qualities of their products and by constraining consumer usage of these products.