A One-Stage Model of Abatement Innovation in Cournot Duopoly: Emissions vs Performance Standards

This paper evaluates the comparative performance of emission and performance standards in a one-stage game of abatement R&D and Cournot duopoly, in terms of R&D propensity, output and social welfare. For each standard, firms simultaneously select R&D and output levels, given the standard...

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Bibliographic Details
Published in:	Environmental modeling & assessment 2023-10, Vol.28 (5), p.875-891
Main Authors:	Amir, Rabah, Gama, Adriana, Lahmandi-Ayed, Rim, Werner, Katarzyna
Format:	Article
Language:	eng
Subjects:	Air pollution Applications of Mathematics Duopoly Earth and Environmental Science Emission analysis Emission standards Emissions Environment Math. Appl. in Environmental Science Mathematical Modeling and Industrial Mathematics Mathematical models Operations Research/Decision Theory Parameters Performance evaluation Performance standards R&D Research & development
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Summary:	This paper evaluates the comparative performance of emission and performance standards in a one-stage game of abatement R&D and Cournot duopoly, in terms of R&D propensity, output and social welfare. For each standard, firms simultaneously select R&D and output levels, given the standard’s exogenous constraint. A performance standard generates higher R&D investments and output, but lower profit, than the pollution-equivalent emissions standard. The same conclusion extends to social welfare only under high demand. We also conduct a similar comparison for each of the two instruments across the one-stage and the two-stage models. The two-stage model leads to higher levels of R&D and industry output for both standards. The same conclusion applies to the social welfare comparison for the emissions standard. However, for the performance standard, the same conclusion requires a damage parameter below a given threshhold. When the standards are chosen to maximize welfare, the performance comparison becomes highly parameter-dependent, except that social welfare is higher for the performance standard. Some policy implications are discussed.
ISSN:	1420-2026 1573-2967