Competitive Permit Markets and Vertical Structures: The Relevance of Imperfectly Competitive Eco-Industries

Sonia Schwartz and Hubert Stahn

Journal of Public Economic Theory, 2014, vol. 16, issue 1, 69-95

Abstract: Permit markets lead polluting firms to purchase abatement goods from an eco-industry which is often concentrated. This paper studies the consequences of this sort of imperfectly competitive eco-industry on the equilibrium choices of the competitive polluting firms. It then characterizes the second-best pollution cap. By comparing this situation to one of perfect competition, we show that Cournot competition on the abatement good market contributes not only to a nonoptimal level of emission reduction but also to a higher permit price, which reduces the production level. These distortions increase with market power, measured by the margin taken by the noncompetitive firms, and suggest a second-best larger pollution cap.

Date: 2014
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Related works:
Working Paper: Competitive permit markets and vertical structures: the relevance of imperfectly competitive eco-industries (2014)
Working Paper: Competitive Permit Markets and Vertical Structures: The Relevance of Imperfect Competitive Eco-Industries (2010)
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