The fact that the compensation
level is less than the harm level implies that the polluter perceives
marginal abatement benefits to be lower than the social marginal abatement benefits. Next, it is of overriding importance whether this intuition carries over to R&D incentives. The sign of
dα
dZ
is determined by the sign of Cxα which in turn is critically determined by the kind of technical change. We will treat respective cases in turn.