Possible inefficiencies in a duopoly trading emission permits

C. Fershtman, A.J. de Zeeuw

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We consider a duopolistic industry in which pollution is a by-product of production and firms are given emission permits that they can trade. The common wisdom is that allowing for trade in emission permits promotes efficiency. We demonstrate that this common wisdom cannot automatically be extended to a duopolistic market structure. The main idea of this paper is that emission permits are used as a commitment device in order to manipulate the equilibrium of the goods market. In particular we show that allowing for permit trade may result in lower output and higher prices, and may shift production from the low to the high cost firm. In addition, it may induce the firms to choose an inferior abatement technology and a more polluting production technology.
Original languageEnglish
Pages (from-to)279-303
JournalStrategic Behavior and the Environment
Volume3
Issue number4
Publication statusPublished - 2013

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Inefficiency
Emission permits
Duopoly
Wisdom
Industry
Production technology
Pollution
Market structure
Abatement
Costs

Cite this

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Possible inefficiencies in a duopoly trading emission permits. / Fershtman, C.; de Zeeuw, A.J.

In: Strategic Behavior and the Environment, Vol. 3, No. 4, 2013, p. 279-303.

Research output: Contribution to journalArticleScientificpeer-review

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AB - We consider a duopolistic industry in which pollution is a by-product of production and firms are given emission permits that they can trade. The common wisdom is that allowing for trade in emission permits promotes efficiency. We demonstrate that this common wisdom cannot automatically be extended to a duopolistic market structure. The main idea of this paper is that emission permits are used as a commitment device in order to manipulate the equilibrium of the goods market. In particular we show that allowing for permit trade may result in lower output and higher prices, and may shift production from the low to the high cost firm. In addition, it may induce the firms to choose an inferior abatement technology and a more polluting production technology.

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