Environmental Regulation, Market Power, and Socially Responsible Firms

Claire Borsenberger, Helmuth Cremer, Denis Joram, Jean-Marie Lozachmeur and Estelle Malavolti

No 21500, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study environmental policy in imperfectly competitive markets where firms differ in their objectives. Alongside standard profit-maximizing firms, we consider welfare-oriented firms that partially or fully internalize environmental externalities but are subject to financial viability constraints. We develop a Cournot model in which production generates emissions and firms may differ in the extent to which they account for environmental damages. We characterize market equilibria and examine the effects of environmental taxes and output subsidies on emissions, output, profits, and welfare. Our analysis shows that standard Pigouvian prescriptions are modified by the presence of market power and by the break-even constraints faced by welfare-oriented firms. While emissions taxes reduce environmental damages, they may also exacerbate underproduction and threaten the viability of socially responsible firms. Conversely, output subsidies may improve welfare despite increasing emissions. The welfare ranking of policy instruments depends critically on the interaction between environmental externalities, imperfect competition, and firms' financial constraints. These findings suggest that environmental policy design should account not only for emissions reduction, but also for the market structure and sustainability of firms with socially oriented objectives.

Keywords: Environmental policy; Pigouvian taxation (search for similar items in EconPapers)
JEL-codes: D62 H23 L13 Q58 (search for similar items in EconPapers)
Date: 2026-05
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Working Paper: Environmental Regulation, Market Power, and Socially Responsible Firms (2026)
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