Environmental Policy under Imperfect Competition : A Survey (original) (raw)

Environmental Policy Under Imperfect Competition

The International Yearbook of Environmental and Resource Economics 2006/2007, 2006

In this article I survey the theoretical literature on environmental policy in the presence of imperfect competition, ranging from early contributions in the 1960s to the present. I cover the following market structures when polluting firms have market power in the output market: monopoly, Cournot oligopoly, Bertrand duopoly with homogeneous products, pricesetting duopoly with differentiating commodities, and models of monopolistic competition. Among the latter I consider Cournot oligopoly with free entry, the Dixit-Stiglitz model, and Salop's model of the circular city with polluting firms. The regulation instruments I concentrate on are emission taxes, tradable permits, and both absolute and relative standards. I also discuss taxation when firms have market power in the input market, and I study models where firms exercise market power in the market of tradable permits. In the latter case I also survey some recent results from the literature on experimental economics. Finally, I briefly discuss environmental policy in open economies when firms have market power in international markets. Here I suggest different decompositions of the unilateral second-best optimal tax rate, thus attempting to unify alternative interpretations of these decompositions in the literature.

The Optimal Taxation of Polluters in Non-Competitive Markets: Does Regulatory Sequence Matter?

2000

The paper examines the first-best use of instruments to control emissions in a non-competitive market with a social planner and with independent competition and environmental regulators. We show that it is optimal to combine a first-best Pigovian tax with one firm-specific ad valorem subsidy per type of firm when entry is blockaded. This is not only more efficient but also has clear informational and regulatory advantages to other suggested tax instruments in the literature, including firm-specific ad valorem taxes that also regulate emissions. With endogenous entry and a homogenous industry we need to supplement a firstbest Pigovian tax and firm-specific subsidies with an entry correcting lump-sum fee. The sequence of introduction of instruments has several efficiency impacts. With blockaded entry it is preferable to introduce the Pigovian tax before a competition regulator determines the ad valorem subsidies. With endogenous entry the first-best Pigovian tax leads to excessive entry, unless an optimal entry correcting ad valorem tax is in place or firms behave competitively after entry. Competition policy that precedes environmental policy will always lead to excessive entry, even if a competitive market emerges after entry.

Optimal Environmental Policy for a Polluting Monopoly with Abatement Costs: Taxes Versus Standards

Environmental Modeling & Assessment, 2018

In this paper, we characterize the optimal environmental policy for a polluting monopoly that devotes resources to abatement activities when damages are caused by a stock pollutant. With this aim, we calculate the stagewise feedback Stackelberg equilibrium of a (differential) policy game where the regulator is the leader and the monopolist is the follower. Our analysis shows that the first-best policy consists of applying a Pigouvian tax and a subsidy on production equal to the difference between the price and the marginal revenue. However, for a stock pollutant, the Pigouvian tax is not equal to the marginal damages but is given by the difference between the social and private valuation of the pollution stock. On the other hand, if a second-best emission tax is used, the tax is lower than the Pigouvian tax and the difference decreases with the price elasticity of the demand. Finally, we find that taxes and standards are equivalent in a second-best setting. In the second part of the paper, we solve a linear-quadratic differential game and we obtain that the first-best tax increases with the pollution stock whereas the subsidy decreases. Moreover, the tax is negative for low values of the pollution stock, i.e., for low values of the pollution stock, we obtain that the social valuation of the stock is lower than the private valuation. Furthermore, when a second-best policy is applied, the steady-state pollution stock is lower than the steady-state pollution stock associated with the efficient outcome.

Emission taxes and feed-in subsidies in the regulation of a polluting monopoly

SERIEs, 2020

The paper studies the use of emission taxes and feed-in subsidies for the regulation of a monopoly that can produce the same good with a technology that employs a polluting input and a clean technology. In the first part of the paper, we show that the efficient solution can be implemented combining a tax on emissions and a subsidy on clean output. The tax is lower than the environmental damages, and the subsidy is equal to the difference between the price and the marginal revenue. In the second part of the paper, the second-best tax and subsidy are also calculated solving a two-stage policy game between the regulator and the monopoly with the regulator acting as the leader of the game. We find that the second-best tax rate can be the Pigouvian tax, but only if the marginal costs of the clean technology are constant. Using a linear–quadratic specification of the model, we show that the clean output is larger when a feed-in subsidy is used than when the tax is applied, but the dirty o...

The timing of environmental policy in a duopolistic market

Economia Agraria y Recursos Naturales, 2015

In this paper the strategic use of innovation by two polluting firms to influence environmental policy is evaluated. The analysis is carried out by comparing two alternative policy regimes for two policy instruments: Taxes and standards. The first of the regimes assumes that the regulator commits to an ex-ante level of the policy instrument. In the second one, there is no commitment. The results show that when there is no commitment and a tax is used to control emissions, the strategic behavior of firms can be welfare improving if the efficiency of the clean technology is relatively low. If this is not the case, the strategic behavior of the duopolists has a detrimental effect on welfare regardless of the policy instrument used to control emissions.

Tax Competition Leading to Strict Environmental Policy

2012

We study tax competition when pollution matters. Most notably, we present a dynamic setting, where the supply of capital is endogenous. It is shown that tax competition may involve stricter environmental policy than the cooperative outcome.

Oligopolistic Competition, Asymmetric Trade and Pollution Taxes

Journal of Economics, Management and Trade, 2019

This study develops a partial equilibrium model for asymmetric trade between two heterogeneous companies located in different countries under reciprocal dumping and oligopolistic competition conditions. All governments must implement a series of strategic environmental policies with the objective of maximizing the wellbeing of the country, considering company utility, consumer benefit, government income obtained through the levying of pollution taxes, and the social cost of polluting. It can be determined that, if the disutility of polluting is considerably high, governments should levy taxes on pollution. On the other hand, they could also opt not to tax pollution, provided that there is compliance with certain additional conditions that depend on other related parameters, such as marginal production costs and the scale of the companies' production.

Noncompliant Oligopolistics Firms and Marketable Pollution Permits: Statics and Dynamics

Annals of Operations Research, 2000

In this paper, we consider the modeling, analysis, and computation of solutions to both static and dynamic models of multiproduct, multi pollutant noncompliant oligopolistic firms who engage in a market for pollution permits. In the case of the static model, we utilize variational inequality theory for the formulation of the governing equilibrium conditions as well as the qualitative analysis of the equilibrium pattem, including sensitivity analysis. We then propose a dynamic model, using the theory of projected dynamical systems, whose set of stationary points coincides with the set of solutions to the variational inequality problem. We propose an algorithm, which is a discretization in time of the dynamic adjustment process, and provide convergence results using the stability analysis results that are also provided herein. Finally, we apply the algorithm to several numerical examples to compute the profitmaximized quantities of the oligopolistic firms' products and the quantities of emissions, along with the equilibrium allocation of licenses and their prices, as well as the possible noncompliant overflows and underflows. This is the first time that these methodologies have been utilized in conjunction to study a problem drawn from environmental policy modeling and analysis.