Second-best taxation for a polluting monopoly with abatement investment
This paper characterizes the optimal tax rule to regulate a polluting monopoly when the firm has the possibility of investing in an abatement technology and the environmental damages are caused by a stock pollutant. The optimal policy is given by the stagewise feedback Stackelberg equilibrium of a dynamic policy game between a regulator and a monopolist. The regulator playing as the leader chooses an emission tax to maximize net social welfare, and the monopolist acting as the follower selects the output and the investment in abatement technology to maximize profits. We find that the optimal tax has two components. The first component is negative and equal to the gap between the marginal re…
On coincidence of feedback and global Stackelberg equilibria in a class of differential games
This paper shows for a class of differential games that the global Stackelberg equilibrium (GSE) coincides with the feedback Stackelberg equilibrium (FSE), although the GSE assumes that the leader/regulator an- nounces at the initial time the regulatory instrument rule she will follow for the rest of the game, while in the FSE, the regulator at any time chooses the optimal level of the regulatory instrument rate. This coincidence is based on the fact that the FSE is calculated using dynamic programming what implies that although the regulator chooses the regulatory instrument rate level that maximizes social welfare, the first-order condition for the maximization of the right-hand side of t…