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Determination of efficient environmental policy instruments under uncertainty with the dominant firm model

Listed author(s):
  • Daiken Mori

    ()

    (Department of Economic Engineering, Kyushu University, Japan)

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    This paper reveals what the optimal environmental policy instruments under uncertainty are when there is one mighty (dominant) firm in a group of firms that produce homogeneous products. We extend and improve the research findings of Weitzman (1974). A dominant firm affects the decision making of other fringe firms. In this paper, we look at a case where a regulator implements environmental policy instruments, such as taxes or a quota, by focusing predominantly on the dominant firm. This paper estimates efficient policy by examining the deadweight loss caused by integrating the marginal abatement cost (MAC) to the marginal damage (MD). We set two parameters to measure the slope of the MD and that of the MAC for the fringe firms against that of the MAC for the dominant firm. This is done to estimate efficient policy and its preconditions. Consequently, the regulation adversely impacts each firm in the dominant firm model. Tax regulation is superior to the implementation of a quota when the slope of the MAC is equal to that of the MD, whereas the two policies have the same effect under the same conditions in the study by Weitzman (1974). Additionally, a quota policy is preferred when the MAC for the fringe firms is flatter than that of the dominant firm in contrast to the study by Weitzman (1974).

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    File URL: http://www.accessecon.com/Pubs/EB/2015/Volume35/EB-15-V35-I4-P265.pdf
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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 35 (2015)
    Issue (Month): 4 ()
    Pages: 2637-2644

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    Handle: RePEc:ebl:ecbull:eb-15-00378
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    1. Ambec, Stefan & Coria, Jessica, 2013. "Prices vs quantities with multiple pollutants," Journal of Environmental Economics and Management, Elsevier, vol. 66(1), pages 123-140.
    2. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    3. Christina Hood, 2010. "Reviewing Existing and Proposed Emissions Trading Systems," IEA Energy Papers 2010/13, OECD Publishing.
    4. Maeda, Akira, 2003. "The Emergence of Market Power in Emission Rights Markets: The Role of Initial Permit Distribution," Journal of Regulatory Economics, Springer, vol. 24(3), pages 293-314, November.
    5. Mandell, Svante, 2008. "Optimal mix of emissions taxes and cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 131-140, September.
    6. Erin Mansur, 2013. "Prices versus quantities: environmental regulation and imperfect competition," Journal of Regulatory Economics, Springer, vol. 44(1), pages 80-102, August.
    7. Clemens Heuson, 2010. "Weitzman Revisited: Emission Standards Versus Taxes with Uncertain Abatement Costs and Market Power of Polluting Firms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(3), pages 349-369, November.
    8. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 753-765.
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