Prices vs. Quantities: Environmental Regulation and Imperfect Competition

Erin Mansur

No 13510, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a market subject to environmental regulation, a firm's strategic behavior affects the production and emissions decisions of all firms. If firms are regulated by a Pigouvian tax, changing emissions will not affect the marginal cost of polluting. However, under a tradable permits system, the polluters' decisions affect the permit price. This paper shows that this feedback effect may increase a strategic firm's output. Relative to a tax, tradable permits improve welfare in a market with imperfect competition. As an application, I model strategic and competitive behavior of wholesalers in the Pennsylvania, New Jersey, and Maryland electricity market. Simulations suggest that exercising market power decreased local pollution by approximately nine percent, and therefore, substantially reduced the price of the region's pollution permits. Furthermore, I find that had regulators opted to use a tax instead of permits, the deadweight loss from imperfect competition would have been approximately seven percent greater.

JEL-codes: L13 L94 Q53 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-com, nep-env, nep-ind, nep-mic and nep-reg
Note: EEE IO
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Citations: View citations in EconPapers (8)

Published as Journal of Regulatory Economics August 2013, Volume 44, Issue 1, pp 80-102 Prices versus quantities: environmental regulation and imperfect competition Erin T. Mansur

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