Working Paper: CEPR ID: DP1065
Authors: Alistair Ulph
Abstract: In this paper I analyse the incentives for governments and producers to act strategically in imperfectly competitive markets when there is Bertrand competition. Strategic behaviour by governments takes the form of distortions to their environmental policy from the first-best rule of equating marginal damage and marginal abatement costs. Strategic behaviour by producers implies inefficient investment in R&D. I contrast the outcomes with Bertrand competition with those in Cournot competition, which I analysed in an earlier paper (Ulph (1993a)). The main findings are: when only governments act strategically, they will set too tough environmental policy and the distortion will be greater if governments use emission standards rather than emission taxes; both results are the opposite of what happened in Cournot competition. When only producers act strategically, they under-invest in R&D (in Cournot they over-invest), but it is not possible to give a universal ranking of policy instruments. When governments and producers act strategically, this reduces the extent of government distortion of environmental policy, which is the same result as with Cournot, but for very different reasons; when governments use emission taxes then with Bertrand competition they set taxes below the first-best level, the reverse of what happens when only governments act strategically.
Keywords: Environmental Policy; Imperfect Competition; International Trade; Strategic Behaviour; Market Conduct
JEL Codes: F12; F13; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government strategic behavior (H10) | Environmental policy outcomes (Q58) |
| Government actions (setting environmental policies) (Q58) | Producer responses (investment in R&D and pricing strategies) (L11) |
| Government strategic behavior (H10) | Distortion in environmental policy outcomes (H23) |
| Producers act strategically (L21) | Underinvestment in R&D (O39) |
| Both governments and producers act strategically (L11) | Reduced distortion in environmental policy (H23) |
| Both governments and producers act strategically (L11) | Ambiguous net effect on environmental policy (Q58) |