Optimal Allocation of Tradable Emission Permits under Upstream-Downstream Strategic Interaction
AbstractIn this paper we analyze environmental regulation based on tradable emission permits in the presence of strategic interaction in an output market with differentiated products. We characterize firms' equilibrium behavior in the permits and in the output market and we show that both firms adopt "rival's cost-rising strategies". Then, we study the problem of the regulator that aims to maximize social welfare, proposing an efficient criterion to allocate permits between firms. We find that the optimal allocation criterion requires a perfect balance between the difference on firms' price-cost margins in the permits and the difference on firms' mark ups in the output market. In light of the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability.
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Bibliographic InfoPaper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 013.
Length: 25 pages
Date of creation: Nov 2012
Date of revision:
Other versions of this item:
- Giuseppe De Feo & Joana Resende & Maria-Eugenia Sanin, 2012. "Optimal Allocation Of Tradable Emission Permits Under Upstream–Downstream Strategic Interaction," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 14(04), pages 1240003-1-1.
- Joana Resende & Maria Eugénia Sanin, 2009. "Optimal allocation of tradable emission permits under upstream-downstream strategic interaction," Working Papers hal-00437645, HAL.
- B4 - Schools of Economic Thought and Methodology - - Economic Methodology
- C0 - Mathematical and Quantitative Methods - - General
- C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-17 (All new papers)
- NEP-ENE-2012-11-17 (Energy Economics)
- NEP-ENV-2012-11-17 (Environmental Economics)
- NEP-REG-2012-11-17 (Regulation)
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