Environmental Policy and Market Structure: A Case of Asymmetric Firms

Indrani Roy Chowdhury ()
Additional contact information
Indrani Roy Chowdhury: Department of Economics, Jamia Millia Islamia (Central University), New Delhi — 110025, India

International Game Theory Review (IGTR), 2015, vol. 17, issue 02, 1-23

Abstract: This study seeks to analyze the impact of governmental regulations on the pollution level in a duopoly framework withendogenousmarket structure. We consider a dirty industry which involves two asymmetric firms, an MNC and a domestic firm, producing a homogenous product, where the MNC is so efficient that in the absence of a joint venture the MNC firm will act as a monopolist. We use a game theoretic framework to demonstrate that anincreasein abatement cost, arising out of stricter government regulations, could trigger a regime-switch from monopoly to joint venture (or from joint venture to monopoly), and consequently may increase pollution. Turning to the welfare analysis, we find that the constrained first best outcome always involves joint venture formation. Given a market structure, we find that the optimal emission tax is always less than the marginal social damage. We then demonstrate that if the synergistic effect (SE) is large and the industry is neither very dirty, nor very clean, then the constrained first best outcome can be implemented by setting the abatement tax appropriately. Otherwise the constrained first best outcome cannot be implemented.

Keywords: Endogenous market structure; joint venture; synergy; moral hazard; abatement tax; nash equilibrium; H23; Q52; Q58; L13; L22; L51 (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2015
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219198915400198
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:igtrxx:v:17:y:2015:i:02:n:s0219198915400198

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219198915400198

Access Statistics for this article

International Game Theory Review (IGTR) is currently edited by David W K Yeung

More articles in International Game Theory Review (IGTR) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().