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Taxing incumbent monopoly to foster entry

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  • Wirl, Franz

Abstract

This paper investigates whether it is welfare enhancing to tax the output of a monopoly in order to foster cost-inefficient entry. This question is of particular concern in the energy markets dominated by cartel-like affiliations (OPEC and oil, Russia's gas exports to Europe) and the interest and practice to stimulate the development of alternative fuels. Making the realistic assumption that none of the players can commit to future policies, subsidies are not a viable strategy for the government. A tax cannot be first best but can be second best if the government cannot force the incumbent monopoly to sell its output at no profit and if the incumbent's profit is discounted. However, stimulating supply by improving the conditions for entry is not the prime concern of taxation (after all it lowers aggregate supplies and may even lower the entrant's supply) but to accrue parts of the monopoly rent.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): 3 (May)
Pages: 388-398

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Handle: RePEc:eee:eneeco:v:33:y:2011:i:3:p:388-398

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Sluggish entry Taxing monopoly Lack of commitment Dynamic game;

References

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  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  14. Wirl Franz, 1994. "Pigouvian Taxation of Energy for Flow and Stock Externalities and Strategic, Noncompetitive Energy Pricing," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 1-18, January.
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Cited by:
  1. Wirl, Franz, 2014. "Taxes versus permits as incentive for the intertemporal supply of a clean technology by a monopoly," Resource and Energy Economics, Elsevier, vol. 36(1), pages 248-269.

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