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Cap and Trade Policies in the Presence of Monopoly and Distortionary Taxation

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Author Info
Don Fullerton
Gilbert E. Metcalf

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Abstract

We extend an analytical general equilibrium model of environmental policy with pre-existing labor tax distortions to include pre-existing monopoly power as well. We show that the existence of monopoly power has two offsetting effects on welfare. First, the environmental policy reduces monopoly profits, and the negative effect on income increases labor supply in a way that partially offsets the pre-existing labor supply distortion. Second, environmental policy raises prices, so interaction with the pre-existing monopoly distortion further exacerbates the labor supply distortion. This second effect is larger, for reasonable parameter values, so the existence of monopoly reduces the welfare gain (or increases the loss) from environmental restrictions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8901.

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Date of creation: Apr 2002
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Handle: RePEc:nbr:nberwo:8901

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Find related papers by JEL classification:
H2 - Public Economics - - Taxation, Subsidies, and Revenue
Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Requate, Till, 2005. "Environmental Policy under Imperfect Competition : A Survey," Economics Working Papers 2005,12, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
  2. Erin T. Mansur, 2007. "Do Oligopolists Pollute Less? Evidence from a Restructured Electricity Market," NBER Working Papers 13511, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Tisdell, J., 2006. "Bringing Biophysical Models into the Economic Laboratory: An Experimental Analysis of Sediment Trading in Australia," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25631, International Association of Agricultural Economists. [Downloadable!]
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