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Limit Pricing and the (In)Effectiveness of the Carbon Tax

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  • Saraly Andrade de Sá
  • Julien Daubanes

Abstract

Demand for oil is very price inelastic. Facing such demand, an extractive cartel induces the highest price that does not destroy its demand, unlike the conventional Hotelling analysis: the cartel tolerates ordinary substitutes to its oil but deters high-potential ones. Limit-pricing equilibria of non-renewable-resource markets sharply differ from usual Hotelling outcomes. Resource taxes have no effect on current extraction; extraction may only be reduced by supporting its ordinary substitutes. The carbon tax applies to oil and also penalizes its ordinary (carbon) substitutes, inducing the cartel to increase current oil production. The carbon tax further affects ultimately-abandoned oil reserves ambiguously.

Suggested Citation

  • Saraly Andrade de Sá & Julien Daubanes, 2014. "Limit Pricing and the (In)Effectiveness of the Carbon Tax," CESifo Working Paper Series 5058, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5058
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    Cited by:

    1. repec:eee:eneeco:v:63:y:2017:i:c:p:185-198 is not listed on IDEAS
    2. Gerard van der Meijden & Karolina Ryszka & Cees Withagen, 2015. "Double Limit Pricing," Tinbergen Institute Discussion Papers 15-136/VIII, Tinbergen Institute, revised 30 Jan 2017.
    3. Okullo, Samuel J. & Reynès, Frédéric, 2016. "Imperfect cartelization in OPEC," Energy Economics, Elsevier, vol. 60(C), pages 333-344.
    4. Justin Leroux & Daniel Spiro, 2017. "Leading the Unwilling: Unilateral Strategies to Prevent Arctic Oil Exploration," CESifo Working Paper Series 6629, CESifo Group Munich.
    5. Gerard van der Meijden & Cees Withagen, 2016. "Limit Pricing, Climate Policies, and Imperfect Substitution," Tinbergen Institute Discussion Papers 16-089/VIII, Tinbergen Institute.
    6. Alberto Behar & Robert A. Ritz, 2016. "OPEC vs US shale oil: Analyzing the shift to a market-share strategy," Cambridge Working Papers in Economics 1623, Faculty of Economics, University of Cambridge.
    7. Alberto Behar & Robert A Ritz, 2016. "An Analysis of OPEC’s Strategic Actions, US Shale Growth and the 2014 Oil Price Crash," IMF Working Papers 16/131, International Monetary Fund.
    8. Gerard C. van der Meijden & Cees A. Withagen, 2016. "Limit Pricing, Climate Policies, and Imperfect Substitution," CESifo Working Paper Series 6163, CESifo Group Munich.

    More about this item

    Keywords

    carbon tax; limit pricing; non-renewable resource; monopoly; demand inelasticity; substitutes subsidies;

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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