Environmental taxes and industry monopolization
This paper considers a market with an incumbent monopolistic firm and a potential entrant. Production by both firms causes polluting emissions. The government selects a tax per unit emission by maximizing social welfare. The size of the tax rate affects whether or not the potential entrant enters the market. We identify the conditions that create a market structure where the preferences of the government and the incumbent firm coincide. Interestingly, there are cases where both the government and incumbent firm prefer a monopoly. Hence, the government might induce profitable monopolization by using a socially optimal tax policy instrument.
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Volume (Year): 36 (2009)
Issue (Month): 1 (August)
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