Higher Costs for Higher Profits: A General Assessment and an Application to Environmental Regulations

Jean-Philippe Nicolai () and Guy Meunier ()
Additional contact information
Jean-Philippe Nicolai: ETH Zurich, Switzerland
Guy Meunier: INRA, France, http://www.versailles-grignon.inra.fr/

No 14/191, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We study the effect of a shock on firms’ costs in a general setting by considering both perfect and imperfect competition and a general cost function. We show that, counterintuitively, firms’ profits may increase with cost increases. We generalize Seade’s (1985) results by considering the adaptation of firms’ technological process. We find an additional effect that we call "technology effect," and which is determined by the extent to which firms’ marginal and average costs differ as a result of a shock. This effect is broken down into two components: the "indirect technology effect," which is related to the elasticity of the demand slope, and the "direct technology effect," which is solely related to technology. We apply this framework to environmental regulations, which provide a good context in which to examine technological process adaptation because they push firms to use abatement technologies and to modify their production processes. We introduce an explicit abatement cost function that is sufficiently flexible to represent the various types of abatement technologies that are found in the literature: end-of-pipe technology, process-integrated technology, and cleaner production (or fuel switching). We show that end-of-pipe abatement technologies induce a positive direct technology effect, that process integrated abatement technologies induce a negative technology effect, and that cleaner production induces a null technology effect.

Keywords: Cournot oligopoly; perfect competition; cost increase; tax on emissions; environmental standards; abatement technologies (search for similar items in EconPapers)
JEL-codes: L13 Q53 Q58 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2014-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cer.ethz.ch/content/dam/ethz/special-in ... papers/WP-14-191.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not found UA (http://www.cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-14-191.pdf [301 Moved Permanently]--> https://www.cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-14-191.pdf [301 Moved Permanently]--> https://cer.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-14-191.pdf)

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:eth:wpswif:14-191

Access Statistics for this paper

More papers in CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich Contact information at EDIRC.
Bibliographic data for series maintained by ().