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When does environmental regulation facilitate entry-deterring practices

  • Espínola-Arredondo, Ana
  • Muñoz-García, Félix

This paper evaluates the welfare benefits of introducing environmental regulation in a market that is subject to the threat of entry. We consider complete and incomplete information settings, where potential entrants use the regulator's tax policy and the incumbent's output decisions in order to infer the incumbent's cost structure. When the regulator is absent, we show that firms' entry-deterring practices increase pollution relative to complete information. Hence, under certain conditions, environmental regulation becomes more beneficial in incomplete than in complete information contexts. Our results, therefore, identify under which cases an under- or over-estimation of the welfare benefits of environmental regulation arises from ignoring the information setting in which firms interact. We also examine how this estimation error increases as firms become more symmetric in their production costs.

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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 65 (2013)
Issue (Month): 1 ()
Pages: 133-152

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Handle: RePEc:eee:jeeman:v:65:y:2013:i:1:p:133-152
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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  1. Paul Milgrom & John Roberts, 1997. "Predation, reputation , and entry deterrence," Levine's Working Paper Archive 1460, David K. Levine.
  2. Harrington, Joseph E, Jr, 1986. "Limit Pricing When the Potential Entrant Is Uncertain of Its Cost Function [Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis]," Econometrica, Econometric Society, vol. 54(2), pages 429-37, March.
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  14. Farrell, Joseph, 1987. "Information and the Coase Theorem," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 113-29, Fall.
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  16. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  17. Kay, J A & Thompson, D J, 1986. "Privatisation: A Policy in Search of a Rationale," Economic Journal, Royal Economic Society, vol. 96(381), pages 18-32, March.
  18. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
  19. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers 709, Cowles Foundation for Research in Economics, Yale University.
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