Optimal Green Technology Adoption and Policy Implementation.

Summary The importance of network externalities affecting technology diffusion in the greening of the economy is analyzed using a simple dynamic model. The socially optimal path of the economy can be implemented by requiring firms to comply to technical standards. As otherwise firms make investment decisions based on their expectations of the magnitude of shocks affecting network effects, using only incentive-based instruments of regulation (emissions taxes and subsidies for green investments) to green the economy leads to efficiency losses due to economic fluctuations.