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@techreport{NBERw16303,
 title = "Regulatory Choice with Pollution and Innovation",
 author = "Charles D. Kolstad",
 institution = "National Bureau of Economic Research",
 type = "Working Paper",
 series = "Working Paper Series",
 number = "16303",
 year = "2010",
 month = "August",
 doi = {10.3386/w16303},
 URL = "http://www.nber.org/papers/w16303",
 abstract = {This paper develops a simple model of a polluting industry and an innovating firm.  The polluting industry is faced with regulation and costly abatement.  Regulation may be taxes or marketable permits.  The innovating firm invests in R&D and develops technologies which reduce the cost of pollution abatement.  The innovating firm can patent this innovation and use a licensing fee to generate revenue.  In a world of certainty, the first best level of innovation and abatement can be supported by either a pollution tax or a marketable permit.  However, the returns to the innovator from innovation are not the same under the two regimes.  A marketable permit system allows the innovator to capture all of the gains to innovation; a tax system involves sharing the gains of innovation between the innovator and the polluting industry.},
}