Limit Pricing, Climate Policies, and Imperfect Substitution
The effects of climate policies are often studied under the assumption of perfectly competitive markets for fossil fuels. In this paper, we allow for monopolistic fossil fuel supply. We show that, if fossil and renewable energy sources are perfect substitutes, a phase will exist during which the monopolist chooses a limit pricing strategy. If limit pricing occurs from the beginning, a renewables subsidy increases initial extraction, whereas a carbon tax leaves initial extraction unaffected. However, if initially fossil fuels are cheaper than renewables, a renewables subsidy and a carbon tax lower initial extraction, contrary to the case of perfect competition. Both policy instruments lower cumulative extraction. If fossil fuels and renewables are imperfect but good substitutes, the monopolist will exhibit â€˜limit pricing resemblingâ€™ behavior, by keeping the effective price of fossil close to that of renewables for considerable time. The empirical question whether energy demand is elastic or inelastic has less drastic implications for the fossil price and extraction paths than under perfect substitutability.
|Date of creation:||2016|
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- Andrade de Sá, Saraly & Daubanes, Julien, 2016.
"Limit pricing and the (in)effectiveness of the carbon tax,"
Journal of Public Economics,
Elsevier, vol. 139(C), pages 28-39.
- Saraly Andrade de Sa & Julien Daubanes, 2014. "Limit-Pricing and the Un(Effectiveness) of the Carbon Tax," OxCarre Working Papers 136, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- Saraly Andrade de SÃ¡ & Julien Daubanes, 2014. "Limit Pricing and the (In)Effectiveness of the Carbon Tax," CESifo Working Paper Series 5058, CESifo Group Munich.
- Gilbert, Richard J. & Goldman, Steven M., 1978. "Potential competition and the monopoly price of an exhaustible resource," Journal of Economic Theory, Elsevier, vol. 17(2), pages 319-331, April.
- Niko Jaakkola, 2013. "Putting OPEC Out of Business," OxCarre Working Papers 099, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- Stephen W. Salant, 1977. "Staving off the backstop: dynamic limit-pricing with a kinked demand curve," International Finance Discussion Papers 110, Board of Governors of the Federal Reserve System (U.S.). Full references (including those not matched with items on IDEAS)
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