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Prices versus quantities: environmental regulation and imperfect competition

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  • Erin Mansur

Abstract

By exercising market power, a firm will distort the production, and therefore the emissions decisions, of all firms in the market. This paper examines how the welfare implications of strategic behavior depend on how pollution is regulated. Under an emissions tax, aggregate emissions do not affect the marginal cost of polluting. In contrast, the price of tradable permits is endogenous. I show when this feedback effect increases strategic firms’ output. Relative to a tax, tradable permits may improve welfare in a market with imperfect competition. As an application, I model strategic and competitive behavior of wholesalers in a Mid-Atlantic electricity market. Simulations suggest that exercising market power decreased emissions locally, thereby substantially reducing the regional tradable permit price. Furthermore, I find that had regulators opted to use a tax instead of permits, the deadweight loss from imperfect competition would have been even greater. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Erin Mansur, 2013. "Prices versus quantities: environmental regulation and imperfect competition," Journal of Regulatory Economics, Springer, vol. 44(1), pages 80-102, August.
    • Handle: RePEc:kap:regeco:v:44:y:2013:i:1:p:80-102
    DOI: 10.1007/s11149-013-9219-6
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    References listed on IDEAS

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    7. Xenophon, Aleksis Kazubiernis & Hill, David John, 2019. "Emissions reduction and wholesale electricity price targeting using an output-based mechanism," Applied Energy, Elsevier, vol. 242(C), pages 1050-1063.

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    More about this item

    Keywords

    Environmental regulation; Market based instruments ; Imperfect competition; Electricity restructuring; H23; L11; L94;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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