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Emissions Control and the Regulation of Product Markets: The Case of Automobiles

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Author Info
Rasha Ahmed (University of Connecticut)
Kathleen Segerson (University of Connecticut)

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Abstract

The paper investigates alternative policies to regulate emissions from polluting product markets, specifically considering the case of the automobiles market. The two policies we consider are: a quota that limits the quantity produced of the polluting model and a more flexible average efficiency standard that requires a minimum energy efficiency across all models produced by a firm, similar to the US Corporate Average Fuel Economy (CAFE) standards. We use a duopoly model of vertical differentiation where firms produce both an economy (i.e., low polluting) version and a luxury (i.e., high polluting) version of a given product. We show that while a quota can raise firm profit over a certain range, CAFE always reduces firm profit relative to the pre-regulation. We also show that while the quota reduces emissions, it is possible that emissions increase under CAFE. The optimal policy choice will depend on the magnitude of unit damages. We show that when unit damages are sufficiently high, the quota policy is more efficient than the average efficiency standard. This suggests that instead of tightening CAFE to limit damages from emissions, policy makers can shift to a quota policy which is both welfare enhancing and more profitable for firms.

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Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2007-40.

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Length: 38 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:uct:uconnp:2007-40

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Related research
Keywords: automobiles market; emission control; green markets; energy/fuel efficiency;

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Find related papers by JEL classification:
Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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  7. Besanko, David & Donnenfeld, Shabtai & White, Lawrence J, 1987. "Monopoly and Quality Distortion: Effects and Remedies," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 743-67, November. [Downloadable!] (restricted)
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  11. Andrew N. Kleit, 2004. "Impacts of Long-Range Increases in the Fuel Economy (CAFE) Standard," Economic Inquiry, Oxford University Press, vol. 42(2), pages 279-294, April. [Downloadable!] (restricted)
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    Other versions:
  14. Crandall, Robert W & Graham, John D, 1989. "The Effect of Fuel Economy Standards on Automobile Safety," Journal of Law & Economics, University of Chicago Press, vol. 32(1), pages 97-118, April.
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    Other versions:
  18. De Fraja, Giovanni, 1996. "Product line competition in vertically differentiated markets," International Journal of Industrial Organization, Elsevier, vol. 14(3), pages 389-414, May. [Downloadable!] (restricted)
  19. Kleit, Andrew N, 1990. "The Effect of Annual Changes in Automobile Fuel Economy Standards," Journal of Regulatory Economics, Springer, vol. 2(2), pages 151-72, June.
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  21. Maxwell, John W & Lyon, Thomas P & Hackett, Steven C, 2000. "Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism," Journal of Law & Economics, University of Chicago Press, vol. 43(2), pages 583-617, October.
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  22. Alley, Wilson A, 1997. "Partial Ownership Arrangements and Collusion in the Automobile Industry," Journal of Industrial Economics, Blackwell Publishing, vol. 45(2), pages 191-205, June. [Downloadable!] (restricted)
  23. Segerson, Kathleen & Miceli, Thomas J., 1998. "Voluntary Environmental Agreements: Good or Bad News for Environmental Protection?," Journal of Environmental Economics and Management, Elsevier, vol. 36(2), pages 109-130, September. [Downloadable!] (restricted)
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