Market distortions and optimal environmental policy instruments

Market distortions and optimal environmental policy instruments In practice, a market does not comprise only one type of firm, resulting in two distortions: negative externalities caused by pollution damage and pricing power enjoyed by dominant firms. This paper examines choice of environmental policy instruments (tax-centered, quota-centered, and mixed policy) in markets where multiple dominant firms are price makers and multiple fringe firms are price takers. Environmental policy is not necessarily applied to all firms or facilities. This study focuses on the situation where only dominant firms are objects of environmental policy because this situation best reflects actual policy instruments. Understanding whether abatement costs exceed the environmental damage is essential to determining the best policy. The major finding of the study is that deadweight loss is reduced if dominant firms adopt eco-friendly technology and the regulator increases the ratio of taxed dominant firms to all dominant firms. Additionally, mixed policy is efficient when market distortion as a result of pricing power decreases. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Regulatory Economics Springer Journals

Market distortions and optimal environmental policy instruments

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Publisher
Springer US
Copyright
Copyright © 2017 by Springer Science+Business Media New York
Subject
Economics; Industrial Organization; Public Finance; Microeconomics
ISSN
0922-680X
eISSN
1573-0468
D.O.I.
10.1007/s11149-017-9331-0
Publisher site
See Article on Publisher Site

Abstract

In practice, a market does not comprise only one type of firm, resulting in two distortions: negative externalities caused by pollution damage and pricing power enjoyed by dominant firms. This paper examines choice of environmental policy instruments (tax-centered, quota-centered, and mixed policy) in markets where multiple dominant firms are price makers and multiple fringe firms are price takers. Environmental policy is not necessarily applied to all firms or facilities. This study focuses on the situation where only dominant firms are objects of environmental policy because this situation best reflects actual policy instruments. Understanding whether abatement costs exceed the environmental damage is essential to determining the best policy. The major finding of the study is that deadweight loss is reduced if dominant firms adopt eco-friendly technology and the regulator increases the ratio of taxed dominant firms to all dominant firms. Additionally, mixed policy is efficient when market distortion as a result of pricing power decreases.

Journal

Journal of Regulatory EconomicsSpringer Journals

Published: May 20, 2017

References

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