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Taxing incumbent monopoly to foster entry

  • Wirl, Franz

This paper investigates whether it is welfare enhancing to tax the output of a monopoly in order to foster cost-inefficient entry. This question is of particular concern in the energy markets dominated by cartel-like affiliations (OPEC and oil, Russia's gas exports to Europe) and the interest and practice to stimulate the development of alternative fuels. Making the realistic assumption that none of the players can commit to future policies, subsidies are not a viable strategy for the government. A tax cannot be first best but can be second best if the government cannot force the incumbent monopoly to sell its output at no profit and if the incumbent's profit is discounted. However, stimulating supply by improving the conditions for entry is not the prime concern of taxation (after all it lowers aggregate supplies and may even lower the entrant's supply) but to accrue parts of the monopoly rent.

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Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 33 (2011)
Issue (Month): 3 (May)
Pages: 388-398

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Handle: RePEc:eee:eneeco:v:33:y:2011:i:3:p:388-398
Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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  1. Franz Wirl, 2007. "Energy Prices and Carbon Taxes under Uncertainty about Global Warming," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 36(3), pages 313-340, March.
  2. de, Vries Frans & Schoonbeek, Lambert, 2008. "Environmental Taxes and Industry Monopolization," Stirling Economics Discussion Papers 2008-19, University of Stirling, Division of Economics.
  3. Strand, Jon, 2010. "Optimal fossil-fuel taxation with backstop technologies and tenure risk," Energy Economics, Elsevier, vol. 32(2), pages 418-422, March.
  4. Juan-Pablo Montero & Matti Liski, 2009. "On Coase and Hotelling," Documentos de Trabajo 351, Instituto de Economia. Pontificia Universidad Católica de Chile..
  5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  6. Tahvonen, Olli, 1996. "Trade with Polluting Nonrenewable Resources," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 1-17, January.
  7. Katsoulacos, Yannis & Xepapadeas, Anastasios, 1995. " Environmental Policy under Oligopoly with Endogenous Market Structure," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(3), pages 411-20, September.
  8. Baffes, John, 1993. "Optimal Tax/Subsidy Intervention in Commodity Markets When the Groups of Interest Are Weighted Unequally," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 20(3), pages 365-78.
  9. Johannes Horner & Morton I. Kamien, 2004. "Coase and Hotelling: A Meeting of the Minds," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 718-723, June.
  10. Gianni De Fraja, . "Regulation and Access Pricing with Asymmetric Information," Discussion Papers 95/5, Department of Economics, University of York.
  11. Conrad, Klaus & Wang, Jianmin, 1993. "The effect of emission taxes and abatement subsidies on market structure," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 499-518.
  12. Im, Jeong-Bin, 2002. "Optimal taxation of exhaustible resource under monopoly," Energy Economics, Elsevier, vol. 24(3), pages 183-197, May.
  13. Wirl, Franz, 2003. " Regulating Vertically Integrated Utilities When Transfers are Costly but Revenues are Beneficial," Public Choice, Springer, vol. 114(1-2), pages 175-95, January.
  14. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  15. Maskin, Eric S & Newbery, David M, 1990. "Disadvantageous Oil Tariffs and Dynamic Consistency," American Economic Review, American Economic Association, vol. 80(1), pages 143-56, March.
  16. repec:cup:cbooks:9780521637329 is not listed on IDEAS
  17. Palokangas, Tapio, 1994. "Taxation, cost-benefit analysis, and monopoly in an open economy," European Journal of Political Economy, Elsevier, vol. 10(3), pages 529-543, October.
  18. Potters, Jan & Sloof, Randolph, 1996. "Interest groups: A survey of empirical models that try to assess their influence," European Journal of Political Economy, Elsevier, vol. 12(3), pages 403-442, November.
  19. Wirl Franz, 1994. "Pigouvian Taxation of Energy for Flow and Stock Externalities and Strategic, Noncompetitive Energy Pricing," Journal of Environmental Economics and Management, Elsevier, vol. 26(1), pages 1-18, January.
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