The Inefficiency of Private Adaptation to Pollution in the Presence of Endogenous Market Structure
AbstractThe paper considers an industry where production costs rise due to pollution, but where this effect can be partially off-set by investing in adaptation as a private good. The focus is not on external effects, but industries where economies of scale are introduced from adapting to pollution. The structure of the resulting oligopolistic market is endogenous, since the level of adaptation is chosen by the firms. The analysis of externalities usually disregards defensive or adaptation measures, with a few exceptions that point to considerable complications. The present debate on adaptation to climate change shows the importance of understanding defensive measures. I show that the market failure caused by economies of scale leads to production costs above the social optimum, i.e. to under-adapation. When pollution increases, adaptation only increases if demand is price inelastic. Otherwise, welfare loss from market failure decreases with pollution. The total welfare loss is only convex if demand is price inelastic and the influence of pollution on production costs is stronger than the influence of adaptation. Concave welfare loss has crucial implications for abatement policies. Copyright Springer Science+Business Media Dordrecht 2014
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Bibliographic InfoArticle provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.
Volume (Year): 57 (2014)
Issue (Month): 1 (January)
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Web page: http://www.springerlink.com/link.asp?id=100263
Climate change; Damage; Oligopoly; Welfare ; Self-protection; Non-convexity;
Other versions of this item:
- Klaus Eisenack, 2010. "The inefficiency of private adaptation to pollution in the presence of endogeneous market structure," Working Papers V-328-10, University of Oldenburg, Department of Economics, revised Aug 2010.
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Costs; Distributional Effects; Employment Effects
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
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