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Market power in an exhaustible resource market: The case of storable pollution permits

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  • Matti Liski
  • Juan-Pablo Montero

    ()
    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

Motivated 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 Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 329.

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Date of creation: 2008
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Handle: RePEc:ioe:doctra:329

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Keywords: Exhaustible resources; market power; pollution markets; durable-good monopoly;

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References

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  1. A. Denny Ellerman & Juan-Pablo Montero, 2005. "The Efficiency and Robustness of Allowance Banking in the U.S. Acid Rain Program," Working Papers 0505, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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  4. Matti Liski & Juan-Pablo Montero, 2004. "Forward trading and collusion in oligopoly," Working Papers 0412, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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  8. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
  9. Juan-Pablo Montero, 1999. "Voluntary Compliance with Market-Based Environmental Policy: Evidence from the U.S. Acid Rain Program," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 998-1033, October.
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  14. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894, October.
    • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, October.
  15. Lewis, Tracy R & Schmalensee, Richard, 1980. "On Oligopolistic Markets for Nonrenewable Natural Resources," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 475-91, November.
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  18. Bernard, Alain & Paltsev, Sergey & Reilly, John & Vielle, Marc & Viguier, Laurent, 2003. "Russia's Role in the Kyoto Protocol," IDEI Working Papers 237, Institut d'Économie Industrielle (IDEI), Toulouse.
  19. Matti Liski & Juan-Pablo Montero, 2006. "On Pollution Permit Banking and Market Power," Journal of Regulatory Economics, Springer, vol. 29(3), pages 283-302, 05.
  20. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
  21. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
  22. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September.
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Cited by:
  1. Juan-Pablo Montero, 2011. "Cuotas de Pesca y Libre Competencia: Algunas Reflexiones para la Nueva Ley de Pesca," Documentos de Trabajo 405, Instituto de Economia. Pontificia Universidad Católica de Chile..

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