Optimal environmental policy for NPS pollution under random welfare

Abstract

This paper investigates the optimal environmental policy for non-point source pollution in a Cournot duopoly competition with product differentiation. Under linear price and cost functions, the optimal environmental policy is determined. In the case of non-point source pollutants, the standard policies cannot be applied since the government has limited information about the individual emissions; only the total size of the pollution is known. The firms want to earn as high as possible profits by selecting most appropriate output levels and abatement technologies. The government wants to maximize the social welfare by the selection of the uniform tax rate. The optimal decisions are determined in a two-stage process. In the second stage, the firms determine their outputs, taking the technologies and the tax rate as given. In the first stage, the firms select abatement technologies with a given tax rate, and the government selects the optimal tax rate with the given choices of the firms. Under asymmetric information, the government constructs the welfare function with uncertainty on the firms’ outputs and determines the optimal tax rate by maximizing the welfare expectation and minimizing the welfare variance. Since the best reply of the government has a complicated form, the Nash equilibrium is numerically and graphically determined. It is shown that ambient charge tax charge effectively controls the total concentration of NPS pollution.