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The inefficiency of private adaptation to pollution in the presence of endogeneous market structure

Author

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  • Klaus Eisenack

    () (University of Oldenburg, Department of Economics)

Abstract

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.)

Suggested Citation

  • Klaus Eisenack, 2010. "The inefficiency of private adaptation to pollution in the presence of endogeneous market structure," Working Papers V-328-10, University of Oldenburg, Department of Economics, revised Aug 2010.
  • Handle: RePEc:old:dpaper:328
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    File URL: http://www.vwl.uni-oldenburg.de/download/V-328-10.pdf
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    References listed on IDEAS

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    7. 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.
    8. Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
    9. 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.
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    11. 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.
    12. 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.
    13. repec:zbw:hohpro:344 is not listed on IDEAS
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    Cited by:

    1. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Fundamental questions on the economics of climate adaptation: Outlines of a new research programme," UFZ Reports 05/2012, Helmholtz Centre for Environmental Research (UFZ).
    2. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Ökonomische Grundfragen der Klimaanpassung: Umrisse eines neuen Forschungsprogramms," UFZ Reports 02/2012, Helmholtz Centre for Environmental Research (UFZ).

    More about this item

    Keywords

    self-protection; climate change; oligopoly; welfare; damage;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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