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Limit pricing and the (in)effectiveness of the carbon tax

Listed author(s):
  • Andrade de Sá, Saraly
  • Daubanes, Julien

We present a theory of limit-pricing monopoly in non-renewable-resource production. Facing a very inelastic demand, an oil monopoly seeks to induce the highest price that does not destroy its demand, unlike the conventional Hotellian analysis: The monopoly tolerates some ordinary substitutes to its oil but deters high-potential ones. With limit pricing, policy-induced extraction changes do not obey the usual logic. For example, oil taxes have no effect on current oil production. Extraction increases when high-potential substitutes are promoted, but can be effectively reduced by supporting ordinary substitutes. The carbon tax not only applies to oil; it also penalizes its ordinary (carbon) substitutes, whose market shares are taken over by the monopoly. Thus, the carbon tax ambiguously affects current and long-term oil production and carbon emissions.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 139 (2016)
Issue (Month): C ()
Pages: 28-39

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Handle: RePEc:eee:pubeco:v:139:y:2016:i:c:p:28-39
DOI: 10.1016/j.jpubeco.2016.04.006
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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