Price Effects, Inefficient Environmental Policy, and Windfall Profits

Jay S. Coggins, Andrew Goodkind, Jason Nguyen and Zhiyu Wang
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Jay S. Coggins: University of Minnesota
Jason Nguyen: University of Minnesota
Zhiyu Wang: National University of Singapore

Environmental & Resource Economics, 2019, vol. 72, issue 3, No 3, 637-656

Abstract: Abstract We examine conditions under which a new or tighter restriction on emissions from a competitive polluting industry creates price effects in adjacent markets. Price effects may arise when a quantity restriction on emissions causes output to fall and, therefore, output price to rise. They may also arise when the required reduction in output causes the price of a polluting input to fall. We model emissions as a fixed proportion of output, limiting the possibilities for input substitutions. The possibility of price effects exists whenever the set of regulated firms is large relative to its input or output markets, a possibility that is expressly ruled out in Montgomery’s (J Econ Theory 5:395–418, 1972) paper. Two potential implications of price effects are explored. One is an efficiency concern: a welfare-maximizing regulator who neglects price effects will require more than the optimal level of abatement. The other is a distributional concern: an emissions restriction might create windfall profits for the polluting industry.

Keywords: Environmental policy; Windfall profits; Price effects (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10640-018-0217-0

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