Stochastic Pollution, Permits, and Merger Incentives
AbstractPollution permit regulations introduce nonlinearities into the objective function of a polluting firm. We develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic. Under perfect competition the fraction of planned pollution covered by permits is shown to be separable from planned production. We also demonstrate that permit management incentives may motivate a merger of otherwise independent firms. Incentives to petition for "bubble" coverage are also considered. The model is studied under risk neutrality and risk aversion. Imperfectly competitive situations in the output and permit markets are also analyzed. Author Keywords: bubble; Cournot; covariation; mergers; stochastic pollution; tradeable permits
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Bibliographic InfoPaper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1700.
Date of creation: 01 May 1999
Date of revision:
Publication status: Published in Journal of Environmental Economics and Management, May 1999, vol. 37, pp. 211-232
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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
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- Hennessy, David A. & Roosen, Jutta, 1999. "Stochastic Pollution, Permits, and Merger Incentives," Journal of Environmental Economics and Management, Elsevier, vol. 37(3), pages 211-232, May.
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