Environmental standards and Cournot duopoly: a stability analysis

In this paper the dynamic effects of public environmental policies are investigated in a Cournot duopoly with both heterogeneous and homogeneous expectations in a context of limited rationality. It is shown that the increase in upper limits to emissions always tends to destabilise markets and generate a chaotic market dynamics in both cases. The policy implication of this result is that the use of environmental policiesmay favour market stability. It is also shown that higher costs of abatement technology entail a higher likelihood of stability loss (although in the heterogeneous expectations case also a decrease in costsmay destabilise).