Prices vs. Quantities: Environmental Regulation and Imperfect Competition / Erin T. Mansur.

Format:

Book

Author/Creator:

Mansur, Erin T.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13510.

NBER working paper series no. w13510

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Prices vs. Quantities

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

In a market subject to environmental regulation, a firm's strategic behavior affects the production and emissions decisions of all firms. If firms are regulated by a Pigouvian tax, changing emissions will not affect the marginal cost of polluting. However, under a tradable permits system, the polluters' decisions affect the permit price. This paper shows that this feedback effect may increase a strategic firm's output. Relative to a tax, tradable permits improve welfare in a market with imperfect competition. As an application, I model strategic and competitive behavior of wholesalers in the Pennsylvania, New Jersey, and Maryland electricity market. Simulations suggest that exercising market power decreased local pollution by approximately nine percent, and therefore, substantially reduced the price of the region's pollution permits. Furthermore, I find that had regulators opted to use a tax instead of permits, the deadweight loss from imperfect competition would have been approximately seven percent greater.

Notes:

Print version record

October 2007.