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Stochastic Pollution, Permits, and Merger Incentives

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  • Hennessy, David A.
  • Roosen, Jutta

Abstract

Pollution 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 Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1700.

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Date of creation: 01 May 1999
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Publication status: Published in Journal of Environmental Economics and Management, May 1999, vol. 37, pp. 211-232
Handle: RePEc:isu:genres:1700

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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  1. Dionne, G. & Mounsif, T., 1996. "Investment Under Demand Uncertainty: The Newsboy Poblem Revidited," Papers, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor. 9622, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
  2. Eeckhoudt, Louis & Meyer, Jack & Ormiston, Michael B, 1997. "The Interaction between the Demands for Insurance and Insurable Assets," Journal of Risk and Uncertainty, Springer, vol. 14(1), pages 25-39, January.
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  4. Meyer, Jack & Ormiston, Michael B, 1989. " Deterministic Transformations of Random Variables and the Comparative Statics of Risk," Journal of Risk and Uncertainty, Springer, vol. 2(2), pages 179-88, June.
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  6. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 402, California Institute of Technology, Division of the Humanities and Social Sciences.
  7. Dale A. Carlson & Anne M. Sholtz, 1994. "Designing Pollution Market Instruments: Cases Of Uncertainty," Contemporary Economic Policy, Western Economic Association International, vol. 12(4), pages 114-125, October.
  8. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March.
  9. Hadar, Josef & Seo, Tae Kun, 1990. "The Effects of Shifts in a Return Distribution on Optimal Portfolios," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 721-36, August.
  10. Stuart Mestelman & Andrew Muller, 1997. "Emissions Trading with Shares and Coupons when Control over Discharges is Uncertain," McMaster Experimental Economics Laboratory Publications, McMaster University 1997-01, McMaster University.
  11. Beavis, Brian & Walker, Martin, 1983. "Random wastes, imperfect monitoring and environmental quality standards," Journal of Public Economics, Elsevier, vol. 21(3), pages 377-387, August.
  12. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(2), pages 185-99, May.
  13. MacMinn, Richard D. & Brockett, Patrick L., 1995. "Corporate spin-offs as a value enhancing technique when faced with legal liability," Insurance: Mathematics and Economics, Elsevier, vol. 16(1), pages 63-68, April.
  14. Beavis, Brian & Dobbs, Ian, 1987. "Firm behaviour under regulatory control of stochastic environmental wastes by probabilistic constraints," Journal of Environmental Economics and Management, Elsevier, vol. 14(2), pages 112-127, June.
  15. Kling, Catherine L. & Innes, Robert & Rubin, Jonathan, 1992. "Emission Permits Under Monopoly," Staff General Research Papers 1607, Iowa State University, Department of Economics.
  16. Beavis, Brian & Walker, Martin, 1983. "Achieving environmental standards with stochastic discharges," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 103-111, June.
  17. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-91, June.
  18. Scott, James H, Jr, 1977. "On the Theory of Conglomerate Mergers," Journal of Finance, American Finance Association, vol. 32(4), pages 1235-50, September.
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Citations

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Cited by:
  1. Maia David & Joan Canton & Bernard Sinclair-Desgagné, 2012. "Environmental regulation and mergers within the eco-industry," Working Papers 169743, Institut National de la Recherche Agronomique, France.
  2. Hennessy, David A. & Wei, Wei, 2000. "Decisions and tradable production quota when yield is uncertain," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, Australian Agricultural and Resource Economics Society, vol. 44(2), June.
  3. Bouwe R. Dijkstra & Dirk T.G. Rübbelke, 2007. "Group Rewards and Individual Sanctions in Environmental Policy," Working Papers 2007.44, Fondazione Eni Enrico Mattei.
  4. Creti, Anna & Villeneuve, Bertrand, 2008. "Equilibrium Storage in a Markov Economy," MPRA Paper 11944, University Library of Munich, Germany.
  5. Joan Canton & Maia David & Bernard Sinclair-Desgagné, 2008. "Environmental Regulation and Horizontal Mergers in the Eco-industry," Working Papers 2008.46, Fondazione Eni Enrico Mattei.
  6. Olivier Rousse & Benoît Sévi, 2005. "Behavioral Heterogeneity in the US Sulfur Dioxide Emissions Allowance Trading Program," ERSA conference papers ersa05p550, European Regional Science Association.
  7. Karl-Martin Ehrhart & Christian Hoppe & Ralf Löschel, 2008. "Abuse of EU Emissions Trading for Tacit Collusion," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(3), pages 347-361, November.
  8. Innes, Robert, 2003. "Stochastic pollution, costly sanctions, and optimality of emission permit banking," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 546-568, May.
  9. Holland, Stephen P. & Moore, Michael R., 2013. "Market design in cap and trade programs: Permit validity and compliance timing," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 671-687.
  10. Lin-Ti Tan, 2005. "Spatial Economic Theory of Pollution Control under Stochastic Emissions," IEAS Working Paper : academic research 05-A009, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  11. L. Lambertini & A. Tampieri, 2012. "Efficient Horizontal Mergers in Polluting Industries with Cournot Competition," Working Papers wp813, Dipartimento Scienze Economiche, Universita' di Bologna.

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