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This paper proposes a modelwhere both regulator and industry behave strategically to endogenously choosethe optimal market instrument. The regulator payoff function includes politicalgains from investment in abatement and improvement in the provision of theenvironmental good in addition to the efficient choice of the instrument level.Whereas the industry’s objective is to minimize abatement costs. Underplausible conditions, the model suggests that quantity instrument is favorableto the regulator. Also, industry with high cost of abatement has a betterincentive to invest in clean technology. Regulator gains from increasing theprovision of environmental good and from industry investing in abatement.


Carbon Tax, Quantity, Environmental Policy

Cite this paper

Atallah, S. 2017 Strategic Choice of Market Instrument. Theoretical Economics Letters, 7, 1029-1042. doi: 10.4236-tel.2017.74070.

Author: Samer Atallah



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