Production Externalities and Investment Caps: a Welfare Analysis under Uncertainty

Luca Di Corato () and Yishay Maoz

No 2019:07, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: In markets where production has adverse externalities, policy makers may wish to increase welfare by imposing a cap on market entries. In this paper, we examine the implications that the cap has on the firms' investment equilibrium policy and on social welfare in the presence of market uncertainty. In contrast with previous literature, we explicitly model the present externality and then let the social planner choose the cap level maximizing welfare. We find that: i) if the consideration of the option value triggers investment at price above the social marginal cost of production, then it is optimal to have no cap at all; ii) otherwise, the cap should be set on the current market quantity and a ban on further market entries should be announced.

Keywords: Investment; Uncertainty; Caps; Competition; Externalities; Welfare (search for similar items in EconPapers)
JEL-codes: C61 D41 D62 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2019
New Economics Papers: this item is included in nep-com, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Production externalities and investment caps: A welfare analysis under uncertainty (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ven:wpaper:2019:07

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