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The Strategic Use of Abatement by a Polluting Monopoly

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  • Martín-Herrán, Guiomar
  • Rubio, Santiago J.

Abstract

This paper evaluates the effects of the lack of regulatory commitment on emission tax applied by the regulator, abatement effort made by the monopoly and social welfare comparing two alternative policy games. The first game assumes that the regulator commits to an ex-ante level of the emission tax. In the second one, in a first stage the regulator and the monopolist simultaneously choose the emission tax and abatement respectively, and in a second stage the monopolist selects the output level. We find that the lack of commitment leads to lower taxation and abatement that yield larger emissions and, consequently, a larger steady-state pollution stock. Moreover, the increase of environmental damages because of the increase in the pollution stock more than compensates the increase in consumer surplus and the decrease in abatement costs resulting in a reduction of social welfare. Thus, our analysis indicates that the lack of commitment has a negative impact of welfare although this detrimental effect decreases with abatement costs.

Suggested Citation

  • Martín-Herrán, Guiomar & Rubio, Santiago J., 2016. "The Strategic Use of Abatement by a Polluting Monopoly," ET: Economic Theory 244532, Fondazione Eni Enrico Mattei (FEEM).
  • Handle: RePEc:ags:feemet:244532
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    References listed on IDEAS

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    More about this item

    Keywords

    Monopoly; Commitment; Emission Tax; Abatement; Stock Pollutant; Research Methods/ Statistical Methods; H23; L12; L51; Q52; Q55;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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