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Pass-through, profits and the political economy of regulation


  • Grey, F.
  • Ritz, R.


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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    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


    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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