Cap and Trade Policies in the Presence of Monopoly and Distortionary Taxation

Don Fullerton () and Gilbert Metcalf ()

No 8901, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We extend an analytical general equilibrium model of environmental policy with pre-existing labor tax distortions to include pre-existing monopoly power as well. We show that the existence of monopoly power has two offsetting effects on welfare. First, the environmental policy reduces monopoly profits, and the negative effect on income increases labor supply in a way that partially offsets the pre-existing labor supply distortion. Second, environmental policy raises prices, so interaction with the pre-existing monopoly distortion further exacerbates the labor supply distortion. This second effect is larger, for reasonable parameter values, so the existence of monopoly reduces the welfare gain (or increases the loss) from environmental restrictions.

JEL-codes: H2 Q2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-reg
Date: Written
Note: PE EEE
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Related works:
Working Paper: Cap and Trade Policies in the Presence of Monopoly and Distortionary Taxation (2000)
Journal Article: Cap and trade policies in the presence of monopoly and distortionary taxation (2002)
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