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Commitment in Environmental Policy as an Entry-Deterrence Tool

Author

Listed:
  • Ana Espinola-Arredondo
  • Felix Munoz-Garcia

    () (School of Economic Sciences, Washington State University)

Abstract

This paper investigates under which conditions governments strategically commit to stringent environmental policies in order to protect domestic markets from entry. We compare social welfare under two policy regimes: a ?exible and in?exible environmental policy. We show that commitment becomes socially optimal when its associated welfare loss, due to a stringent fee across time, is smaller than its welfare gain, which arises from an improved environmental quality. Otherwise, the regulator optimally chooses a ?exible environmental policy which cannot credibly deter entry. In addition, we demonstrate that the incentives of the social planner and the incumbent fi?rm are not necessarily aligned regarding entry deterrence. In particular, under certain conditions the regulator ?nds socially optimal to practice entry deterrence whereas the incumbent would actually prefer entry.

Suggested Citation

  • Ana Espinola-Arredondo & Felix Munoz-Garcia, "undated". "Commitment in Environmental Policy as an Entry-Deterrence Tool," Working Papers 2011-6, School of Economic Sciences, Washington State University.
  • Handle: RePEc:wsu:wpaper:munoz-10
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    File URL: http://faculty.ses.wsu.edu/WorkingPapers/Munoz/WP2011-6.pdf
    File Function: First version, 2011
    Download Restriction: no

    More about this item

    Keywords

    Entry deterrence; Emission fees; Perfect commitment;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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