• Environmental and Resource Economics Review
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• v.13 no.1
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• pp.133-160
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• 2004

This paper analyzes the long-run effects of an environmental tax levied on motor vehicles. If the government charges their consumers the tax as much as the monetary value of the external damage due to the pollutants emitted from motor vehicles, the operation of vehicles is reduced to the socially optimal level, alike to ordinary Pigouvian taxes. Thus, air pollution abatement is realized in the short run. Moreover, in the long run, the tax leads the consumers to prefer cleaner vehicles owing to the tax burden, and so the firms produce the motor vehicles with less pollutants emitted to meet the change of demand. Therefore, the tax has the additional effect on air pollution abatement. This result is obtained from the simulation in the oligopoly model which has an interior solution when the vehicles are horizontally and vertically differentiated.