Environmental Taxes Versus Subsidies with Unionized Labor Markets. A Note on the Role of Wage Setting Structure

In the context of a unionized labor market and green consumerism, this paper analyzes, within a vertically differentiated duopoly, which environmental policy – taxes or subsidies – is more efficient in reducing polluting emissions and enhancing social welfare. The structure of wage setting proves to be crucial in determining final outcomes. Specifically, under firm-specific unions with decentralized wage setting, a subsidy policy is more efficient than a tax policy. Conversely, when an industry-wide union sets wages centrally, the tax policy outperforms the subsidy policy.