Limit pricing and the (in)effectiveness of the carbon tax

Saraly Andrade de Sa () and Julien Daubanes ()

Journal of Public Economics, 2016, vol. 139, issue C, 28-39

Abstract: We present a theory of limit-pricing monopoly in non-renewable-resource production. Facing a very inelastic demand, an oil monopoly seeks to induce the highest price that does not destroy its demand, unlike the conventional Hotellian analysis: The monopoly tolerates some ordinary substitutes to its oil but deters high-potential ones. With limit pricing, policy-induced extraction changes do not obey the usual logic. For example, oil taxes have no effect on current oil production. Extraction increases when high-potential substitutes are promoted, but can be effectively reduced by supporting ordinary substitutes. The carbon tax not only applies to oil; it also penalizes its ordinary (carbon) substitutes, whose market shares are taken over by the monopoly. Thus, the carbon tax ambiguously affects current and long-term oil production and carbon emissions.

Keywords: Limit-pricing monopoly; Demand elasticity; Carbon tax; Non-renewable resources; Oil substitutes; Shale oil (search for similar items in EconPapers)
JEL-codes: H21 L12 Q30 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0047272716300457
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Limit Pricing and the (In)Effectiveness of the Carbon Tax (2014)
Working Paper: Limit Pricing and the (in)Effectiveness of the Carbon Tax (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:139:y:2016:i:c:p:28-39

DOI: 10.1016/j.jpubeco.2016.04.006

Access Statistics for this article

Journal of Public Economics is currently edited by R. Boadway and J. Poterba

More articles in Journal of Public Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().