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On Environmental Regulation of Oligopoly Markets: Emission versus Performance Standards

Rabah Amir (), Adriana Gama () and Katarzyna Werner ()
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Katarzyna Werner: Manchester Metropolitan University

Environmental & Resource Economics, 2018, vol. 70, issue 1, 147-167

Abstract: Abstract By specializing Montero’s (J Environ Econ Manag 44:23–44, 2002) model of environmental regulation under Cournot competition to an oligopoly with linear demand and quadratic abatement costs, we extend his comparison of firms incentives to invest in R&D under emission and performance standards by solving for a closed form solution of the underlying two-stage game. This allows for a full comparison of the two instruments in terms of their resulting propensity for R&D and equilibrium industry output. In addition, we incorporate an equilibrium welfare analysis. Finally, we investigate a three-stage game wherein a welfare-maximizing regulator sets a socially optimal emission cap under each policy instrument. For the latter game, while closed-form solutions for the subgame-perfect equilibrium are not possible, we establish numerically that the resulting welfare is always larger under a performance standard.

Keywords: Environmental regulation; Environmental innovation; End of pipe abatement; Emission standard; Performance standard (search for similar items in EconPapers)
Date: 2018
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