Optimal Allocation Of Tradable Emission Permits Under Upstream–Downstream Strategic Interaction
AbstractIn this paper, we analyze environmental regulation based on tradable emission permits in the presence of strategic interaction in an output market with differentiated products. We characterize firms' equilibrium behavior in the permits and in the output market and we show that both firms adopt "rival's cost-rising strategies". Then, we study the problem of the regulator that aims at maximizing social welfare, proposing an efficient criterion to allocate permits between firms. We find that the optimal allocation criterion requires a perfect balance between the difference on firms' price-cost margins in the permits market and the difference on firms' mark ups in the output market. In light of the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Game Theory Review.
Volume (Year): 14 (2012)
Issue (Month): 04 ()
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Other versions of this item:
- Joana Resende & Maria Eugénia Sanin, 2009. "Optimal allocation of tradable emission permits under upstream-downstream strategic interaction," Working Papers hal-00437645, HAL.
- Giuseppe De Feo & Joana Resende & Maria Eugenia Sanin, 2012. "Optimal Allocation of Tradable Emission Permits under Upstream-Downstream Strategic Interaction," DEM Working Papers Series 013, University of Pavia, Department of Economics and Management.
- B4 - Schools of Economic Thought and Methodology - - Economic Methodology
- C0 - Mathematical and Quantitative Methods - - General
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
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