Taxes versus standards in a mixed economy

Abstract

Governments have recently become increasingly concerned about environmental policy choice in a mixed economy because many countries are mixed economies where public and private firms engage in the output market. This paper provides an analytical framework to compare emission taxes and emission standards in a mixed economy. Through theoretical analysis and numerical example, two main conclusions are drawn. First, the ranking of emission taxes and standards in the aspect of bringing about greater social welfare depends on the policy stringency. More specifically, for high levels of environmental stringency, taxes yield a greater social welfare than the standards regulation does, while the opposite conclusion holds for low levels of environmental stringency. Second, the total production level under emission taxes is always larger than under emission standards. Our findings provide important implications for the policy choice and design in a mixed economy.