Strategic Environmental Policies: Electric vehicles vs Internal Combustion Engine Vehicles

Abstract

In a world collapsed by pollution and environmental degradation, the decision of policies in favour of the environment is affected by the dilemma between economic efficiency and environmental protection. The objective of this article is to analyse this dilemma from the construction of a theoretical two-stage game model in which an environmental tax policy is chosen by government and local firms may produce differentiated vehicles: Electric Vehicles, Hybrid Vehicles, or Internal Combustion Engine Vehicles. At the first stage, the government determines the tax level on pollution taking the firms’ output levels as given. At the second stage, firms, competing in an oligopolistic market, choose their output and emission levels observing the tax level set by the government. It is found that a high perception of pollution damage encourages the setting of a pollution tax despite the fall in the consumer surplus and the profits of Internal Combustion Engine Vehicles producers; this policy encourages the production of Electric Vehicles and Hybrid Vehicles. Otherwise, the government is not willing to set a severe pollution policy. This work is relevant because the level of environmental policy can be determined from the perception that people have about the environmental damage caused by the production of cars.