Efficient Tax-Subsidy for a Polluting Durable Good Industry without Commitment Ability

This paper considers efficient regulation in polluting and imperfectly competitive durable-good markets without commitment ability of producers. If producers rent the durable, then the efficient regulatory scheme consists of a Pigovian emissions tax and a subsidy on the stock of the durable good. In sales markets, efficiency is attained by adjusting the stock subsidy and introducing a durability tax/subsidy. If direct durability regulation is not feasible, then efficiency can still be achieved, but the emissions tax has to be adjusted as well. The efficient stock subsidy may change its sign so that it becomes a tax. Policy implications and their relevance are discussed.