Stochastic Pollution, Permits, and Merger Incentives

David Hennessy and Jutta Roosen

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: Pollution permit regulations introduce nonlinearities into the objective function of a polluting firm. We develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic. Under perfect competition the fraction of planned pollution covered by permits is shown to be separable from planned production. We also demonstrate that permit management incentives may motivate a merger of otherwise independent firms. Incentives to petition for "bubble" coverage are also considered. The model is studied under risk neutrality and risk aversion. Imperfectly competitive situations in the output and permit markets are also analyzed. Author Keywords: bubble; Cournot; covariation; mergers; stochastic pollution; tradeable permits

Date: 1999-05-01
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Published in Journal of Environmental Economics and Management, May 1999, vol. 37, pp. 211-232

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Journal Article: Stochastic Pollution, Permits, and Merger Incentives (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:1700

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