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Externality Control and Endogenous Market Structure under Uncertainty: the Price vs. Quantity dilemma

Author

Listed:
  • Luca Di Corato

    (Department of Economics, Ca' Foscari University of Venice)

  • Yishay D. Maoz

    (The Open University of Israel)

Abstract

In a competitive industry where production entails a negative externality, a welfare-maximizing regulator considers, as control instruments, setting a cap on the industry output or levying an output tax. We embed this scenario within a dynamic setup where market demand is stochastic and market entry is irreversible. We firstly determine the industry equilibrium under each policy and then determine the cap level and the tax rate which maximize welfare in each case. We show that a first-best outcome can be achieved through the tax policy while the cap policy may only qualify as a second-best alternative.

Suggested Citation

  • Luca Di Corato & Yishay D. Maoz, 2022. "Externality Control and Endogenous Market Structure under Uncertainty: the Price vs. Quantity dilemma," Working Papers 2022: 13, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2022:13
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    References listed on IDEAS

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    More about this item

    Keywords

    Investment; Uncertainty; Caps; Taxes; Competition; Externalities; Welfare;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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