Collusion Inducing Taxation of a Polluting Oligopoly

H. Benchekroun, A. Ray Chaudhuri

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Abstract

We show that an environmental regulation such as a tax on pollution can act as a collusive device and induce stable cartelization in an oligopolistic polluting industry. We consider a dynamic game where pollution is allowed to accumulate into a stock over time and a cartel that includes all the firms in the industry. We show that a tax on pollution emissions can make it unprofitable for any firm to leave the cartel. Moreover the cartel formation can diminish the welfare gain from environmental regulation. We provide an example where social welfare under environmental regulation and collusion of firms is below social welfare under a laisser-faire policy.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages23
Volume2008-80
Publication statusPublished - 2008

Publication series

NameCentER Discussion Paper
Volume2008-80

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Keywords

  • pollution tax
  • oligopoly
  • cartel formation
  • coalition formation
  • differential game

Cite this

Benchekroun, H., & Ray Chaudhuri, A. (2008). Collusion Inducing Taxation of a Polluting Oligopoly. (CentER Discussion Paper; Vol. 2008-80). Tilburg: Microeconomics.