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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)

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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Bibliographic 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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Phone: (860) 486-4889
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Web page: http://www.econ.uconn.edu/
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Keywords: automobiles market; emission control; green markets; energy/fuel efficiency;

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References

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Cited by:
  1. Ahmed, Rasha & Segerson, Kathleen, 2011. "Collective voluntary agreements to eliminate polluting products," Resource and Energy Economics, Elsevier, vol. 33(3), pages 572-588, September.

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