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Effectiveness of ambient charges and product differentiation under a Bertrand duopoly

Abstract

Hideki Sato

In this study, I examine the effectiveness of ambient charges-a policy instrument aimed at reducing nonpoint source pollution originating from a duopolistic industry. Ganguli and Raju concluded in their study that ambient charges generate perverse effects under a Bertrand competition, implying that an increase in ambient charges by the government would increase total emissions. Accordingly, we argue that the effects of ambient charges become perverse depending on the degree of product differentiation between firms. In particular, ambient charges will not have perverse effects if an increase in the product price of one firm increases the market demand for the other firm’s product by nearly twofold. Therefore, when considering the effects of ambient charges in a duopolistic market, they might be an effective policy instrument not only under Cournot competition, which has already been verified, but also under Bertrand competition.