Market Power in an Exhaustible Resource Market: The Case of Storable Pollution Permits

Matti Liski () and Juan-Pablo Montero

Economic Journal, 2011, vol. 121, issue 551, 116-144

Abstract: Motivated by the structure of existing pollution permit markets, we study the equilibrium path that results from allocating an initial stock of storable permits to an agent, or a group of agents, in a position to exercise market power. A large seller of permits exercises market power no differently than a large supplier of an exhaustible resource. However, whenever the large agent's endowment falls short of his efficient endowment – allocation profile that would exactly cover his emissions along the perfectly competitive path – market power is greatly mitigated by a commitment problem, much like in a durable-goods monopoly. We illustrate our theory with two applications: the US sulphur market and the international carbon market that may eventually develop beyond the Kyoto Protocol.

Date: 2011
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http://hdl.handle.net/10.1111/j.1468-0297.2010.02366.x

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Working Paper: Market power in an exhaustible resource market: The case of storable pollution permits (2008)
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