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Pollution Tax Under Imperfect Competition and Air Transport in a Domestic Economy

Salami Dada Kareem


Odubunmi Ayoola Sunkanmi


Atoyebi Kehinde


Lawal A. Samad

Salami Dada Kareem 1 ,

Odubunmi Ayoola Sunkanmi 1 Atoyebi Kehinde 1 Lawal A. Samad 1 
  1. Department of Economics, Lagos State University, Ojo, Nigeria 1

Pages: 44-51

DOI: 10.18488/journal.62.2017.43.44.51

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Article History:

Received: 16 May, 2017
Revised: 13 June, 2017
Accepted: 22 June, 2017
Published: 05 July, 2017


This paper empirically demonstrates the possibility of setting up an optimal pollution tax under imperfect markets and international trade in a domestic economy. The model illustrates a situation of partial equilibrium characterized by imperfect competition among domestic producers, where the domestic good is used as an alternative for an imported polluting commodity. In this paper, we bring in the possibility that the domestic firms can introduce innovative ideas through investment in R&D. The result shows that the optimal pollution tax under domestic economic distortions is a function of a ‘domestic production effect’ and a ‘pollution effect’. The paper concludes that when the firms execute R&D expenditures, the optimal policy adds an ‘innovative effect’, which captures the change in welfare coming from a reduction in total costs and this lead our results to a win-win situation.

Contribution/ Originality
The paper contributes in the existing literature by illustrating the case of partial equilibrium characterized by imperfect market among domestic producers. It introduces innovative ideas through   the incorporation of investment in research and development. The paper concludes that under a win – win situation optimal environmental policy represent a policy tax.


Optimal pollution tax, Perfect competition, CO2 emission, Domestic firm and endogenous Investment



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Corden, W., 2013. Trade policy and economic welfare. 2nd Edn., Oxford: Clarendon Press.

Kennedy, P.W., 2014. Equilibrium pollution taxes in open economies with imperfect competition. Journal of Environmental Economics and Management, 27: 49-63.

Porter, M., 2015. The competitive advantage of the nations. New York: Free Press.

Solarin, D.R. and R.L. Bradford, 2014. Taxing variable cost: Environmental regulation as industrial policy. Journal of Environmental Economics and Management, 30: 282-300.

Ulph, A., 2014. Environmental policy and international trade when governments and producers act strategically. Journal of Environmental Economics and Management, 30: 256-281.


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This study received no specific financial support.

Competing Interests:

The authors declare that they have no competing interests.


All authors contributed equally to the conception and design of the study.

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