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Limit Pricing and the (In)Effectiveness of the Carbon Tax

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  • Saraly Andrade de Sá
  • Julien Daubanes

Abstract

Demand for oil is very price inelastic. Facing such demand, an extractive cartel induces the highest price that does not destroy its demand, unlike the conventional Hotelling analysis: the cartel tolerates ordinary substitutes to its oil but deters high-potential ones. Limit-pricing equilibria of non-renewable-resource markets sharply differ from usual Hotelling outcomes. Resource taxes have no effect on current extraction; extraction may only be reduced by supporting its ordinary substitutes. The carbon tax applies to oil and also penalizes its ordinary (carbon) substitutes, inducing the cartel to increase current oil production. The carbon tax further affects ultimately-abandoned oil reserves ambiguously.

Suggested Citation

  • Saraly Andrade de Sá & Julien Daubanes, 2014. "Limit Pricing and the (In)Effectiveness of the Carbon Tax," CESifo Working Paper Series 5058, CESifo.
  • Handle: RePEc:ces:ceswps:_5058
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    More about this item

    Keywords

    carbon tax; limit pricing; non-renewable resource; monopoly; demand inelasticity; substitutes subsidies;
    All these keywords.

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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