There is an increasing number of firms across a variety of industries, which are taking
steps to differentiate themselves as environmentally conscious firms, both to achieve
gains from product differentiation and to reduce production and pollution abatement costs.
In light of this trend in many industries, this chapter considers a horizontally differentiated
Cournot model to examine (i) the role of pollution abatement efforts by firms on the characterization
of the optimal emission tax and (ii) the adjustment of optimal policy as products
become differentiated. The analysis indicates that in the presence of abatement efforts by
firms the government may afford a tax reduction to address the output distortion as products
become more differentiated. Additionally, the analysis suggests that policies which may encourage
firms to differentiate themselves as environmentally conscious firms may aid in the
reduction of industry emissions, and at the same time allow a reduction in the emission tax
to address the output distortion present in imperfectly competitive markets.
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