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Initial Allocation Effects in Permit Markets with Bertrand Output Oligopoly

  • Calford, Evan M.
  • Heinzel, Christoph
  • Betz, Regina

We analyse the efficiency effects of the initial permit allocation given to firms with market power in both permit and output market. We examine two models: a long- run model with endogenous technology and capacity choice, and a short-run model with fixed technology and capacity. In the long run, quantity pre-commitment with Bertrand competition can yield Cournot outcomes also under emissions trading. In the short run, Bertrand output competition reproduces the effects derived under Cournot competition, but displays higher pass-through profits. In a second-best setting of overallocation, a tighter emissions target tends to improve permit-market efficiency in the short run.

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File URL: http://purl.umn.edu/95066
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Paper provided by Australian National University, Environmental Economics Research Hub in its series Research Reports with number 95066.

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Date of creation: Mar 2010
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Handle: RePEc:ags:eerhrr:95066
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