Environmental Policies, Mergers and Welfare

Unlike previous theoretical studies, we examine the welfare effects of a merger when participating firms are in a pollution-intensive sector. With passive environmental policy we show that profitable mergers reduce welfare; and this is because the reduction in consumer surplus and tax revenue dominates any rise in profit and utility. On the contrary, with active policies we show that profitable mergers are welfare enhancing due to lower gross pollution, higher consumer surplus, lower tax costs and efficiency gains. The results imply that though environmental policies are adopted for the primary purpose of reducing pollution, such policies may have a negative effect on social welfare if they do not take into account the market structure and competitiveness of sectors.