The 2017 Erik Kempe Award has been given to Mads GREAKER and Kristoffer MIDTTØMME for their article
Optimal Environmental Policy with Network Effects: Will Pigouvian Taxation Lead to Excess Inertia?
Journal of Public Economics 143, 27-38, 2016
Abstract. We study the diffusion of a clean substitute to a dirty durable in a dynamic model. Consumer utility of both durables increases in their respective market shares due to network effects.
First, we characterize the optimal dirty good tax. The tax should achieve a long run optimal division of the market between the two goods. Along the transition path to this steady state the optimal tax depends on the current and future market shares of the clean durable. Thus, even if the marginal environmental damage from an additional dirty durable is constant, the optimal tax should not be constant.
Second, we study whether excess inertia can occur if the emission tax is not optimally set. We then find that a constant tax that only accounts for the environmental damage caused by the dirty good may lead to excess inertia. Excess inertia could happen even if the clean technology is proprietary, and the technology owner has incentives to sponsor the initial market diffusion of the technology.
The Nomination Committee, composed by Thomas Aronsson (chair), Christa Brunnschweiler and Ulrich J. Wagner, has awarded this paper for the following motivation:
Mads Greaker and Kristoffer Midttømme receive the Erik Kempe Award for a novel and insightful contribution to the literature on environmental tax policy, which focuses on economies with network goods. They characterize the optimal tax on an externality-generating good in this environment. They also show, by means of numerical simulations that are calibrated to the adoption of electric vehicles in Norway, that network effects may temporarily motivate much higher taxes than suggested by standard Pigouvian formulas, and that suboptimal tax policies neglecting these network effects may hinder the diffusion of clean substitutes for the dirty technology. As such, Greaker and Midttømme have contributed to the academic literature by examining optimal taxation of externality-generating goods in a novel and arguably important setting, and by addressing a timely policy problem of clear practical relevance.