DP955 Environmental Policy Under Oligopoly with Endogenous Market Structure

Author(s): Yannis Katsoulacos, Anastasios Xepapadeas
Publication Date: May 1994
Keyword(s): Endogenous Market Structure, Externalities, Oligopoly, Pigouvian Taxes
JEL(s): D43, D62, H21
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=955

Emission taxes under oligopoly with both fixed number and endogenous market structure (perhaps the most relevant market structures for policy issues) are examined. In the latter case, and contrary to what is expected under imperfect competition, the optimal tax could exceed marginal external damages, which implies that externalities generated by oligopolistic firms could be optimally controlled by over-internalizing environmental damages. Under endogenous market structure, a scheme consisting of a licence fee and a second-best under-internalizing emission tax can increase social welfare when compared with the use of a single emission tax exceeding marginal damages.