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Pass-through, profits and the political economy of regulation

Author

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  • Grey, F.
  • Ritz, R.

Abstract

Government regulation, such as the pricing of externalities, often raises the unit costs of regulated firms, and its impact on their profits is important to its political economy. We introduce a reduced-form model (“GLM”) that nests existing models of imperfect competition under weaker assumptions. We show how a firm's cost passthrough is a sufficient statistic for the profit impact of regulation. We apply the GLM to carbon pricing for US airlines. We find large inter-firm heterogeneity in pass-through, even for a uniform cost shock. The GLM allows us to sidestep estimation of a consumer demand system, firm markups and conduct parameters. We derive the second-best emissions tax including lobbying a government “for sale”.

Suggested Citation

  • Grey, F. & Ritz, R., 2018. "Pass-through, profits and the political economy of regulation," Cambridge Working Papers in Economics 1859, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1859
    Note: rar36
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    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1859.pdf
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    Cited by:

    1. Karsten Neuhoff & Robert A. Ritz, 2019. "Carbon cost pass-through in industrial sectors," Working Papers EPRG1935, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.

    More about this item

    Keywords

    Cost pass-through; regulation; carbon pricing; airlines; political economy;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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