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Prices versus quantities: environmental regulation and imperfect competition

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  • Erin Mansur

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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

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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 44 (2013)
Issue (Month): 1 (August)
Pages: 80-102

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Handle: RePEc:kap:regeco:v:44:y:2013:i:1:p:80-102

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Web page: http://www.springerlink.com/link.asp?id=100298

Related research

Keywords: Environmental regulation; Market based instruments ; Imperfect competition; Electricity restructuring; H23; L11; L94;

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References

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  1. Paul L. Joskow & Edward Kohn, 2002. "A Quantitative Analysis of Pricing Behavior in California's Wholesale Electricity Market During Summer 2000," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-35.
  2. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
  3. Hahn, Robert W, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 753-65, November.
  4. 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.
  5. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Stephen P. Holland & Erin T. Mansur, 2007. "Is Real-Time Pricing Green? The Environmental Impacts of Electricity Demand Variance," NBER Working Papers 13508, National Bureau of Economic Research, Inc.
  7. Adam Jaffe & Richard Newell & Robert Stavins, 2002. "Environmental Policy and Technological Change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(1), pages 41-70, June.
  8. Stavins Robert N., 1995. "Transaction Costs and Tradeable Permits," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 133-148, September.
  9. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  10. Mansur, Erin T, 2007. "Upstream Competition and Vertical Integration in Electricity Markets," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 125-56, February.
  11. Ireland, N J, 1977. "Ideal Prices vs. Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 183-86, February.
  12. Fevrier, Philippe & Linnemer, Laurent, 2004. "Idiosyncratic shocks in an asymmetric Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 835-848, June.
  13. Shaffer, Sherrill, 1995. "Optimal Linear Taxation of Polluting Oligopolists," Journal of Regulatory Economics, Springer, vol. 7(1), pages 85-100, January.
  14. Levin, Dan, 1985. "Taxation within Cournot oligopoly," Journal of Public Economics, Elsevier, vol. 27(3), pages 281-290, August.
  15. Erin T. Mansur, 2007. "Measuring Welfare in Restructured Electricity Markets," NBER Working Papers 13509, National Bureau of Economic Research, Inc.
  16. Erin T. Mansur, 2007. "Do Oligopolists Pollute Less? Evidence from a Restructured Electricity Market," NBER Working Papers 13511, National Bureau of Economic Research, Inc.
  17. Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
  18. Barrett, Scott, 1994. "Strategic environmental policy and intrenational trade," Journal of Public Economics, Elsevier, vol. 54(3), pages 325-338, July.
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