Prices vs. quantities
Subtitle: environmental regulation and imperfect competition
By: Erin T. Mansur.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- no. 13510.; Working paper series (National Bureau of Economic Research) -- working paper no. 13510.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 36
Subjects: Environmental policy -- Economic aspects -- United States -- Econometric models; Pollution -- Econometric models
Description: 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: "October 2007"

Includes bibliographical references (p. 29-31).

Also available in PDF from the NBER world wide web site (www.nber.org).