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Possible Inefficiencies in a Duopoly Trading Emission Permits

Author

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  • Fershtman, Chaim
  • de Zeeuw, Aart

Abstract

We consider a duopolistic industry in which pollution is a by-product of production and firms are given emission permits that they can trade. The common wisdom is that allowing for trade in emission permits promotes efficiency. We demonstrate that this common wisdom cannot automatically be extended to a duopolistic market structure. The main idea of this paper is that emission permits are used as a commitment device in order to manipulate the equilibrium of the goods market. In particular we show that allowing for permit trade may result in lower output and higher prices, and may shift production from the low to the high cost firm. In addition, it may induce the firms to choose an inferior abatement technology and a more polluting production technology.

Suggested Citation

  • Fershtman, Chaim & de Zeeuw, Aart, 2013. "Possible Inefficiencies in a Duopoly Trading Emission Permits," Strategic Behavior and the Environment, now publishers, vol. 3(4), pages 279-303, August.
    • Handle: RePEc:now:jnlsbe:102.00000031
    DOI: 10.1561/102.00000031
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    More about this item

    Keywords

    Duopoly; Pollution; Tradable permits; Abatement;
    All these keywords.

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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