The inefficiency of private adaptation to pollution in the presence of endogeneous market structure
The paper considers an industry where production costs rise due to pollution, but where this effect can be partially off-set by investing in adaptation as a private good. The focus is not on external effects, but industries where economies of scale are introduced from adapting to pollution. The structure of the resulting oligopolistic market is endogenous, since the level of adaptation is chosen by the firms. The analysis of externalities usually disregards defensive or adaptation measures, with a few exceptions that point to considerable complications. The present debate on adaptation to climate change shows the importance of understanding defensive measures. I show that the market failure caused by economies of scale leads to production costs above the social optimum, i.e. to under-adapation. When pollution increases, adaptation only increases if demand is price inelastic. Otherwise, welfare loss from market failure decreases with pollution. The total welfare loss is only convex if demand is price inelastic and the influence of pollution on production costs is stronger than the influence of adaptation. Concave welfare loss has crucial implications for abatement policies. Copyright Springer Science+Business Media Dordrecht 2014
(This abstract was borrowed from another version of this item.)
|Date of creation:||Aug 2010|
|Date of revision:||Aug 2010|
|Publication status:||Published in Oldenburg Working Papers V-328-10|
|Contact details of provider:|| Postal: 26111 Oldenburg|
Phone: +49 441 798-4107
Fax: +49 441 798-4116
Web page: http://www.vwl.uni-oldenburg.de/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
- Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
- Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
- Farrell, Joseph, 1986.
"How effective is potential competition?,"
Elsevier, vol. 20(1), pages 67-70.
- N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
- Udo Ebert & Heinz Welsch, 2012.
"Adaptation and Mitigation in Global Pollution Problems: Economic Impacts of Productivity, Sensitivity, and Adaptive Capacity,"
Environmental & Resource Economics,
Springer;European Association of Environmental and Resource Economists, vol. 52(1), pages 49-64, May.
- Udo Ebert & Heinz Welsch, 2011. "Adaptation and Mitigation in Global Pollution Problems: Economic Impacts of Productivity, Sensitivity and Adaptive Capacity," Working Papers V-332-11, University of Oldenburg, Department of Economics, revised Feb 2011.
- repec:zbw:hohpro:344 is not listed on IDEAS
- Steven Winrich, J., 1982. "Convexity and corner solutions in the theory of externality," Journal of Environmental Economics and Management, Elsevier, vol. 9(1), pages 29-41, March.
- Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
- McKitrick, R. & Collinge, R.A., 1998.
"The Existence and Uniqueness of Optimal Pollution Policy in the Presence of Victim Defense Measures,"
1998-6, University of Guelph, Department of Economics and Finance.
- McKitrick, Ross & Collinge, Robert A., 2002. "The Existence and Uniqueness of Optimal Pollution Policy in the Presence of Victim Defense Measures," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 106-122, July.
- Lecocq, Franck & Shalizi, Zmarak, 2007. "Balancing expenditures on mitigation of and adaptation to climate change : an exploration of Issues relevant to developing countries," Policy Research Working Paper Series 4299, The World Bank.
- Maskin, Eric, 1986. "The Existence of Equilibrium with Price-Setting Firms," American Economic Review, American Economic Association, vol. 76(2), pages 382-86, May.
- Klaus Eisenack & Rebecca Stecker, 2012. "A framework for analyzing climate change adaptations as actions," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 17(3), pages 243-260, March.
- Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
When requesting a correction, please mention this item's handle: RePEc:old:dpaper:328. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catharina Schramm)
If references are entirely missing, you can add them using this form.