The abatement game in a dynamic oligopoly: social welfare versus profits

This article considers an N-firm oligopoly with abating and non-abating firms and analyses a dynamic setting in which the environmental regulator sets the tax rate to incentivise firms to undertake emission-reduction actions according to different hypotheses (fixed rule and optimal rule). The behaviour of the public authority sharply affects the firm’s (individual) incentive to move towards the abatement activity over time. This changes the number of (non)abating firms on the market and the corresponding social welfare outcomes. The article eventually shows that the environmental policy may cause oscillations resulting in a coexistence of the two types of firms in the long term and pinpoints the welfare outcomes emerging in the model.