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Limit pricing and the (in)effectiveness of the carbon tax

Saraly Andrade de Sa () and Julien Daubanes ()

Journal of Public Economics, 2016, vol. 139, issue C, 28-39

Abstract: We present a theory of limit-pricing monopoly in non-renewable-resource production. Facing a very inelastic demand, an oil monopoly seeks to induce the highest price that does not destroy its demand, unlike the conventional Hotellian analysis: The monopoly tolerates some ordinary substitutes to its oil but deters high-potential ones. With limit pricing, policy-induced extraction changes do not obey the usual logic. For example, oil taxes have no effect on current oil production. Extraction increases when high-potential substitutes are promoted, but can be effectively reduced by supporting ordinary substitutes. The carbon tax not only applies to oil; it also penalizes its ordinary (carbon) substitutes, whose market shares are taken over by the monopoly. Thus, the carbon tax ambiguously affects current and long-term oil production and carbon emissions.

Keywords: Limit-pricing monopoly; Demand elasticity; Carbon tax; Non-renewable resources; Oil substitutes; Shale oil (search for similar items in EconPapers)
JEL-codes: Q30 L12 H21 (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: Limit Pricing and the (In)Effectiveness of the Carbon Tax (2014) Downloads
Working Paper: Limit-Pricing and the Un(Effectiveness) of the Carbon Tax (2014) Downloads
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Handle: RePEc:eee:pubeco:v:139:y:2016:i:c:p:28-39