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Regulatory Choice with Pollution and Innovation

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  • Charles D. Kolstad
Abstract
This paper develops a simple model of a polluting industry and an innovating firm. The polluting industry is faced with regulation and costly abatement. Regulation may be taxes or marketable permits. The innovating firm invests in R&D and develops technologies which reduce the cost of pollution abatement. The innovating firm can patent this innovation and use a licensing fee to generate revenue. In a world of certainty, the first best level of innovation and abatement can be supported by either a pollution tax or a marketable permit. However, the returns to the innovator from innovation are not the same under the two regimes. A marketable permit system allows the innovator to capture all of the gains to innovation; a tax system involves sharing the gains of innovation between the innovator and the polluting industry.

Suggested Citation

  • Charles D. Kolstad, 2010. "Regulatory Choice with Pollution and Innovation," NBER Working Papers 16303, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16303
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    References listed on IDEAS

    as
    1. Montero, Juan-Pablo, 2002. "Permits, Standards, and Technology Innovation," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 23-44, July.
    2. F. M. Scherer, 1967. "Research and Development Resource Allocation Under Rivalry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 81(3), pages 359-394.
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    8. Krysiak, Frank C., 2008. "Prices vs. quantities: The effects on technology choice," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1275-1287, June.
    9. Popp, David, 2004. "ENTICE: endogenous technological change in the DICE model of global warming," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 742-768, July.
    10. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626, National Bureau of Economic Research, Inc.
    11. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
    12. Denicolo, Vincenzo, 1999. "Pollution-Reducing Innovations under Taxes or Permits," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 184-199, January.
    13. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
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    Cited by:

    1. Ashokankur Datta & E. Somanathan, 2016. "Climate Policy and Innovation in the Absence of Commitment," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(4), pages 917-955.
    2. Carrión-Flores, Carmen E. & Innes, Robert & Sam, Abdoul G., 2013. "Do voluntary pollution reduction programs (VPRs) spur or deter environmental innovation? Evidence from 33/50," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 444-459.

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    More about this item

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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