Environmental Taxation and the Structure of the Eco-industry

We examine the e®ect of an emission tax when the abatement good or service is supplied by an imperfectly competitive eco-industry with free entry. We show that a higher tax always increases the number of ¯rms in the eco-industry whereas it has an ambiguous e®ect on indi- vidual and total output in the eco-industry. We derive the condition under which total abatement may actually decrease with the emission tax. We then study the policy implications of these results in terms of optimal tax levels.