Make or buy? It is the question: A study in the presence of carbon tax

In this paper, we explore make-or-buy decision of a manufacturer, taking the effect of carbon tax (CT) into account. We characterize the optimal strategies including the production quantity, wholesale price, and CT rate with the CT rate considered exogenous or endogenous, respectively. We also examine the optimal make-or-buy strategies for the manufacturer under different levels of CT rate. In addition, We conduct an analysis for the government regarding when it should or should not regulate the CT rate. With the studies, some significant managerial findings are obtained for the make-or-buy decision making in the presence of CT. In particular, it is found that in addition to CT rate level, the ratio between marginal environmental cost and marginal gross profit of the product (without excluding CT) can essentially affect whether or not the government should regulate the CT rate.