Mitigating market power under tradeable permits

Peter Heindl

No 12-065, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: As shown by R. Hahn [6], free allocation equal to the amount of permits a firm with market power uses in equilibrium, can prevent welfare losses. If the necessary amount of free allocation is not provided to the firm with market power, a second best solution is obtained where marginal abatement costs of regulated firms are not equated. In this paper, it is proposed that the government may change the economy wide emissions constraint (cap) as a response to market power, e.g. when free allocation cannot be adjusted. Changing the cap can lead to a situation where marginal abatement costs are equated in the presence of market power. Because changing the cap will lead to changes of social welfare, both effects must be balanced. It is shown that there exists a second best social optimum by balancing the positive effect of limiting market power and the negative effect of changing the cap.

Keywords: Tradeable Permits; Market Power; Environmental Regulation (search for similar items in EconPapers)
JEL-codes: D21 L12 Q53 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-com, nep-ene, nep-env, nep-reg and nep-res
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:12065

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