PRODUCTION SMOOTHING UNDER ENVIRONMENTAL CONSTRAINTS

This is an investigation into how optimal production rates and optimal price levels react to the introduction of an environmental tax on emissions. While, in the case of perfect competition, a linear tax has no effect, I show that in the monopolistic case the optimal production and emissions rates decrease in all instances‐without an additional smoothing effect. The desirable effect, emissions peaks being cut off, is only achieved when a progressive tax is imposed.