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The inefficiency of private adaptation to pollution in the presence of endogeneous market structure

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  • Klaus Eisenack

    ()
    (University of Oldenburg, Department of Economics)

Abstract

The paper considers an industry where production costs rise due to pollution, but where this effect can be partially off-set by investing in adaptation as a private good. The focus is not on external effects, but industries where economies of scale are introduced from adapting to pollution. The structure of the resulting oligopolistic market is endogenous, since the level of adaptation is chosen by the firms. The analysis of externalities usually disregards defensive or adaptation measures, with a few exceptions that point to considerable complications. The present debate on adaptation to climate change shows the importance of understanding defensive measures. I show that the market failure caused by economies of scale leads to production costs above the social optimum, i.e. to under-adapation. When pollution increases, adaptation only increases if demand is price inelastic. Otherwise, welfare loss from market failure decreases with pollution. The total welfare loss is only convex if demand is price inelastic and the influence of pollution on production costs is stronger than the influence of adaptation. Concave welfare loss has crucial implications for abatement policies. Copyright Springer Science+Business Media Dordrecht 2014

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by University of Oldenburg, Department of Economics in its series Working Papers with number V-328-10.

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Length: 25 pages
Date of creation: Aug 2010
Date of revision: Aug 2010
Publication status: Published in Oldenburg Working Papers V-328-10
Handle: RePEc:old:dpaper:328

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Web page: http://www.vwl.uni-oldenburg.de/
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Related research

Keywords: self-protection; climate change; oligopoly; welfare; damage;

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References

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  1. McKitrick, Ross & Collinge, Robert A., 2002. "The Existence and Uniqueness of Optimal Pollution Policy in the Presence of Victim Defense Measures," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 106-122, July.
  2. Udo Ebert & Heinz Welsch, 2012. "Adaptation and Mitigation in Global Pollution Problems: Economic Impacts of Productivity, Sensitivity, and Adaptive Capacity," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 52(1), pages 49-64, May.
  3. Steven Winrich, J., 1982. "Convexity and corner solutions in the theory of externality," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 29-41, March.
  4. Maskin, Eric, 1986. "The Existence of Equilibrium with Price-Setting Firms," American Economic Review, American Economic Association, vol. 76(2), pages 382-86, May.
  5. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
  6. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
  7. Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
  8. Lecocq, Franck & Shalizi, Zmarak, 2007. "Balancing expenditures on mitigation of and adaptation to climate change : an exploration of Issues relevant to developing countries," Policy Research Working Paper Series 4299, The World Bank.
  9. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
  10. Klaus Eisenack & Rebecca Stecker, 2012. "A framework for analyzing climate change adaptations as actions," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 17(3), pages 243-260, March.
  11. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
  12. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
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Cited by:
  1. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Ökonomische Grundfragen der Klimaanpassung: Umrisse eines neuen Forschungsprogramms," UFZ Reports 02/2012, Helmholtz Centre for Environmental Research (UFZ).
  2. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Fundamental questions on the economics of climate adaptation: Outlines of a new research programme," UFZ Reports 05/2012, Helmholtz Centre for Environmental Research (UFZ).

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