On Outsourced Abatement Services: Market Power and Efficient Regulation

Damien Sans, Sonia Schwartz and Hubert Stahn

Annals of Economics and Statistics, 2019, issue 136, 55-78

Abstract: In this paper, we consider competitive polluting firms that outsource their abatement activity to an upstream imperfect competitive eco-industry to comply with environmental regulation. In this case, we show that an usual environmental policy based on a Pigouvian tax or a pollution permit market reaches the first-best outcome. The main intuition is based on the idea that purchasing pollution reduction services instead of pollution abatement inputs modifies for each potential tax rate (or out of the equilibrium permit price) the nature of the arbitrage between pollution and abatement. This induces a demand for abatement services which is, at least partially, strongly elastic and therefore strongly reduces upstream market power. This argument is first illustrated with an upstream monopoly selling eco-services to a representative polluting firm under a usual Pigouvian tax. We then progressively extend the result to permit markets, heterogeneous downstream polluters and heterogeneous upstream Cournot competitors.

Keywords: Environmental Regulation; Eco-Industry; Imperfect Competition; Abatement Outsourcing. (search for similar items in EconPapers)
JEL-codes: D43 Q58 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Working Paper: On Outsourced Abatement Services: Market Power and Efficient Regulation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2019:i:136:p:55-78

DOI: 10.15609/annaeconstat2009.136.0055

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