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On Outsourced Abatement Services: Market Power and Efficient Regulation

Author

Listed:
  • Damien Sans
  • Sonia Schwartz
  • Hubert Stahn

Abstract

In this paper, we consider competitive polluting firms that outsource their abatement activity to an upstream imperfect competitive eco-industry to comply with environmental regulation. In this case, we show that an usual environmental policy based on a Pigouvian tax or a pollution permit market reaches the first-best outcome. The main intuition is based on the idea that purchasing pollution reduction services instead of pollution abatement inputs modifies for each potential tax rate (or out of the equilibrium permit price) the nature of the arbitrage between pollution and abatement. This induces a demand for abatement services which is, at least partially, strongly elastic and therefore strongly reduces upstream market power. This argument is first illustrated with an upstream monopoly selling eco-services to a representative polluting firm under a usual Pigouvian tax. We then progressively extend the result to permit markets, heterogeneous downstream polluters and heterogeneous upstream Cournot competitors.

Suggested Citation

  • Damien Sans & Sonia Schwartz & Hubert Stahn, 2019. "On Outsourced Abatement Services: Market Power and Efficient Regulation," Annals of Economics and Statistics, GENES, issue 136, pages 55-78.
  • Handle: RePEc:adr:anecst:y:2019:i:136:p:55-78
    DOI: 10.15609/annaeconstat2009.136.0055
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    File URL: https://www.jstor.org/stable/10.15609/annaeconstat2009.136.0055
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    More about this item

    Keywords

    Environmental Regulation; Eco-Industry; Imperfect Competition; Abatement Outsourcing.;

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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