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Market Power in an Exhaustible Resource Market: The Case of Storable Pollution Permits

  • Matti Liski
  • Juan‐Pablo Montero

Motivated by the structure of existing pollution permit markets, we study the equilibrium path that results from allocating an initial stock of storable permits to an agent, or a group of agents, in a position to exercise market power. A large seller of permits exercises market power no differently than a large supplier of an exhaustible resource. However, whenever the large agent's endowment falls short of his efficient endowment – allocation profile that would exactly cover his emissions along the perfectly competitive path – market power is greatly mitigated by a commitment problem, much like in a durable-goods monopoly. We illustrate our theory with two applications: the US sulphur market and the international carbon market that may eventually develop beyond the Kyoto Protocol.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 121 (2011)
Issue (Month): 551 (March)
Pages: 116-144

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Handle: RePEc:ecj:econjl:v:121:y:2011:i:551:p:116-144
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