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Mitigating market power under tradeable permits

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  • Heindl, Peter

Abstract

As shown by R. Hahn [6], free allocation equal to the amount of permits a firm with market power uses in equilibrium, can prevent welfare losses. If the necessary amount of free allocation is not provided to the firm with market power, a second best solution is obtained where marginal abatement costs of regulated firms are not equated. In this paper, it is proposed that the government may change the economy wide emissions constraint (cap) as a response to market power, e.g. when free allocation cannot be adjusted. Changing the cap can lead to a situation where marginal abatement costs are equated in the presence of market power. Because changing the cap will lead to changes of social welfare, both effects must be balanced. It is shown that there exists a second best social optimum by balancing the positive effect of limiting market power and the negative effect of changing the cap.

Suggested Citation

  • Heindl, Peter, 2012. "Mitigating market power under tradeable permits," ZEW Discussion Papers 12-065, ZEW - Leibniz Centre for European Economic Research.
  • Handle: RePEc:zbw:zewdip:12065
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    References listed on IDEAS

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    More about this item

    Keywords

    Tradeable Permits; Market Power; Environmental Regulation;
    All these keywords.

    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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