Market power in an exhaustible resource market: The case of storable pollution permits
AbstractMotivated by the structure of existing pollution permit markets, we study the equilibrium path that results from allocating an initial stock of storable permits to a large polluting agent and a competitive fringe. A large agent selling permits in the market exercises market power no differently than a large supplier of an exhaustible resource. However, whenever the large agent’s endowment falls short of its efficient endowment –allocation profile that would exactly cover its emissions along the perfectly competitive path– the market power problem disappears, much like in a durable-good monopoly. We illustrate our theory with two applications: the carbon market that may eventually develop under the Kyoto Protocol and beyond and the US sulfur market.
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Bibliographic InfoPaper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 329.
Date of creation: 2008
Date of revision:
Exhaustible resources; market power; pollution markets; durable-good monopoly;
Other versions of this item:
- Matti Liski & Juan‐Pablo Montero, 2011. "Market Power in an Exhaustible Resource Market: The Case of Storable Pollution Permits," Economic Journal, Royal Economic Society, vol. 121(551), pages 116-144, March.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-COM-2008-02-09 (Industrial Competition)
- NEP-ENE-2008-02-09 (Energy Economics)
- NEP-ENV-2008-02-09 (Environmental Economics)
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