Limit Pricing and the (in)Effectiveness of the Carbon Tax

Saraly Andrade de Sa () and Julien Daubanes ()

No 136, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: Demand for oil is very price inelastic. Facing such demand, an extractive cartel induces the highest price that does not destroy its demand, unlike the conventional Hotelling analysis: the cartel tolerates ordinary substitutes to its oil but deters high-potential ones. Limit-pricing equilibria of non-renewable-resource markets sharply differ from usual Hotelling outcomes. Resource taxes have no effect on current extraction; extraction may only be reduced by supporting its ordinary substitutes. The carbon tax applies to oil and also penalizes its ordinary (carbon) substitutes, inducing the cartel to increase current oil production. The carbon tax further affects ultimately-abandoned oil reserves ambiguously.

Keywords: Limit pricing; Non-renewable resource; Monopoly; Demand inelasticity; Substitutes subsidies (search for similar items in EconPapers)
JEL-codes: H21 L12 Q30 Q42 (search for similar items in EconPapers)
Date: 2014-05-28
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Limit pricing and the (in)effectiveness of the carbon tax (2016)
Working Paper: Limit Pricing and the (In)Effectiveness of the Carbon Tax (2014)
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