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Environmental policy and stable collusion: The case of a dynamic polluting oligopoly

Hassan Benchekroun () and Amrita Ray Chaudhuri ()

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 4, 479-490

Abstract: We show that the imposition of a Markovian tax on emissions, that is, a tax rate which depends on the pollution stock, can induce stable cartelization in an oligopolistic polluting industry. This does not hold for a uniform tax. Thus, accounting for the feedback effect that exists within a dynamic framework, where pollution is allowed to accumulate into a stock over time, changes the result obtained within a static framework. Moreover, the cartel formation can diminish the welfare gain from environmental regulation such that welfare under environmental regulation and collusion of firms lies below that under a laissez-faire policy.

Keywords: Pollution; tax; Oligopoly; Cartel; formation; Coalition; formation; Differential; game (search for similar items in EconPapers)
Date: 2011
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:4:p:479-490