COORDINATION OF TAXATION AND INNOVA TION FOR THE PROTECTION OF THE INTERNATIONAL ENVIRONMENT by SLIM

Two regulators face an international environmental problem because of the transfrontier polluting activity of their domestic firm. These firms can adopt a new and less polluting production technology by incurring an actualized investment cost. When the cost of immediate adoption of the cleaner technology is relatively high and the environmental taxation is well chosen, firms will adopt it at finite but different dates even though the model is symmetric and there is no informational asymmetry. The optimal emission tax parameter is greater under cooperation which induce firms to adopt the friendly technology earlier than in the non-cooperative regime. Consequently, residual emissions are lower under cooperation and intertemporal individual social welfare is greater. However, the private diffusion is the same in the two regimes.