Abstract
Background: The Resource Tax Law has been officially implemented on September 1, 2020 in China. This law presents the “Fee-to-Tax” reform of water resources. Methods: This article compares the effects of the “Fee-to-Tax” reform under an asymmetric duopoly with perfect information. Results: First, an analysis when all firms simultaneously respond to the water resource policy is conducted. The mechanisms of the two policies are different: the water resource fee affects output by reducing market size, while the water resource tax reduces output by amplifying the weighted cost difference effects between companies. It is shown that the tax works better than the fee for eliminating backward production capacity. Then, a comparison of the situation when companies respond sequentially is carried out. When a low-cost firm is in the leading position, the collection of fees actually reduces the output difference, whereas the tax improves it. When a high-cost firm acts as a leader, the effects depend on the cost difference. When the cost difference between firms is small, the first-move advantage of high-cost firms dominates the cost advantages of low-cost firms. Therefore, a higher tax rate yields a smaller output difference. Conclusions: When cost differences are relatively larger, the cost advantage of low-cost firms dominates the first-move advantage of high-cost firms. Therefore, the “Fee-to-Tax” reform provides some benefits to maintain the environmental development of some water-mining or related industries.
Analysis of the Fee-to-Tax Reform on Water Resources in China