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Market Power in Laboratory Emission Permit Markets

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  • Robert Godby

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Abstract

Many proposals suggesting the use of markets tocontrol pollution assume markets will becompetitive. When markets do not exhibitcompetitive characteristics, however, shouldthey still be expected to result in efficiencyimprovement relative to traditional approaches? This paper employs experimental economicmethods to examine the effect of marketstructure on the use of marketable emissionspermits. Results indicate that in a market withone dominant firm and a number of fringe firms,strategic manipulation occurs repeatedly in thelaboratory as predicted by market power models,undermining the allocative and dynamicefficiency benefits such markets offer. Whenfirms compete in a downstream product marketdominated by the same single firm, marketefficiency can actually be reduced with theimplementation of permit markets. Final marketefficiencies reflect initial endowments and areinfluenced by competitive conditions elsewherein the economy, indicating that policy-makersshould carefully consider whether markets areappropriate in such circumstances. Copyright Kluwer Academic Publishers 2002

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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 23 (2002)
Issue (Month): 3 (November)
Pages: 279-318

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Handle: RePEc:kap:enreec:v:23:y:2002:i:3:p:279-318

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: cost predation; double auctions; emission trading; market experiments; market power; vertical integration;

References

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  1. Misiolek, Walter S. & Elder, Harold W., 1989. "Exclusionary manipulation of markets for pollution rights," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 156-166, March.
  2. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  3. Cason, T.N. & Gangadharan, L., 1997. "An Experimental Study of Electronic Bulletin Board Trading for Emission Permits," Department of Economics - Working Papers Series 592, The University of Melbourne.
  4. Noussair, C.N. & Plott, C. & Riezman, R., 1995. "An experimental investigation of the patterns of international trade," Open Access publications from Tilburg University urn:nbn:nl:ui:12-387775, Tilburg University.
  5. Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
  6. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. Cason, Timothy N, 1995. "An Experimental Investigation of the Seller Incentives in the EPA's Emission Trading Auction," American Economic Review, American Economic Association, vol. 85(4), pages 905-22, September.
  8. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 95-114, Spring.
  9. R. Andrew Muller & Stuart Mestelman, 1998. "What have we learned from emissions trading experiments?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 225-238.
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Citations

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Cited by:
  1. Beat Hintermann, 2013. "Market Power in Emission Permit Markets: Theory and Evidence," CESifo Working Paper Series 4447, CESifo Group Munich.
  2. Itkonen, Juha, 2009. "Päästökauppajärjestelmien linkittämisen ilmastopoliittiset vaikutukset
    [Linking emissions trading systems and climate policy]
    ," MPRA Paper 30171, University Library of Munich, Germany.
  3. Oczkowski, Edward, 2008. "Excess Demand, Market Power and Price Adjustment in Clearinghouse Auction Markets for Water," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 38(2), pages 261-276, September.
  4. Anthony Heyes, 2009. "Is environmental regulation bad for competition? A survey," Journal of Regulatory Economics, Springer, vol. 36(1), pages 1-28, August.
  5. Requate, Till, 2005. "Environmental Policy under Imperfect Competition : A Survey," Economics Working Papers 2005,12, Christian-Albrechts-University of Kiel, Department of Economics.
  6. Beat Hintermann, 2011. "Market Power, Permit Allocation and Efficiency in Emission Permit Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 49(3), pages 327-349, July.

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