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Collusion Inducing Taxation of a Polluting Oligopoly

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Author Info

  • Benchekroun, H.
  • Ray Chaudhuri, A.

    (Tilburg University, Center for Economic Research)

Abstract

We show that an environmental regulation such as a tax on pollution can act as a collusive device and induce stable cartelization in an oligopolistic polluting industry. We consider a dynamic game where pollution is allowed to accumulate into a stock over time and a cartel that includes all the firms in the industry. We show that a tax on pollution emissions can make it unprofitable for any firm to leave the cartel. Moreover the cartel formation can diminish the welfare gain from environmental regulation. We provide an example where social welfare under environmental regulation and collusion of firms is below social welfare under a laisser-faire policy.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-80.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200880

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Related research

Keywords: pollution tax; oligopoly; cartel formation; coalition formation; differential game;

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References

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  14. Mason, Charles F. & Sandler, Todd & Cornes, Richard, 1988. "Expectations, the commons, and optimal group size," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 99-110, March.
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Cited by:
  1. James E. Prieger & Nicholas J. Sanders, 2011. "Verifiable and Non-Verifiable Anonymous Mechanisms for Regulating a Polluting Monopolist," Discussion Papers 10-034, Stanford Institute for Economic Policy Research.

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