Competitive permit markets and vertical structures: the relevance of imperfectly competitive eco-industries

Abstract : Permit markets lead polluting firms to purchase abatement goods from an eco-industry which is often concentrated. This paper studies the consequences of this sort of imperfectly competitive eco-industry on the equilibrium choices of the competitive polluting firms. It then characterizes the second-best pollution cap. By comparing this situation to one of perfect competition, we show that Cournot competition on the abatement good market contributes not only to a nonoptimal level of emission reduction but also to a higher permit price, which reduces the production level. These distortions increase with market power, measured by the margin taken by the noncompetitive firms, and suggest a second-best larger pollution cap.
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Submitted on : Thursday, January 9, 2014 - 4:02:30 PM
Last modification on : Monday, March 4, 2019 - 2:04:27 PM

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  • HAL Id : halshs-00926472, version 1

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Sonia Schwartz, Hubert Stahn. Competitive permit markets and vertical structures: the relevance of imperfectly competitive eco-industries. Journal of Public Economic Theory, Wiley, 2014, 16 (1), pp.69-95. ⟨halshs-00926472⟩

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