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Environmental Regulation in Oligopoly Markets: A Study of Electricity Restructuring

Erin T. Mansur

Dartmouth College - Dartmouth Economics Department; National Bureau of Economic Research (NBER)

September 2004

Yale SOM Working Paper No. ES-38

In an oligopoly market subject to environmental regulation through tradable pollution permits, polluters' output decisions affect the price of polluting. With a pollution tax, this feedback effect is absent. In a permit regime, I show that the feedback effect increases strategic firms' production and improves welfare. I empirically test the environmental implications of oligopoly behavior in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and a tradable permit system took effect. Surprisingly, I show that 33-42 percent of the emissions reductions resulted from strategic behavior in the electricity market. Simulations suggest that welfare loss would have been seven percent greater under a tax than with tradable permits.

Number of Pages in PDF File: 52

Keywords: Environmental regulation, tradeable permits, pollution tax, oligopoly, electricity

JEL Classification: H23, L11, L94

working papers series

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Date posted: November 2, 2004  

Suggested Citation

Mansur, Erin T., Environmental Regulation in Oligopoly Markets: A Study of Electricity Restructuring (September 2004). Yale SOM Working Paper No. ES-38. Available at SSRN: http://ssrn.com/abstract=601366

Contact Information

Erin T. Mansur (Contact Author)
Dartmouth College - Dartmouth Economics Department ( email )
Hanover, NH 03755
United States
603 646 2531 (Phone)
603 646 2122 (Fax)
HOME PAGE: http://www.dartmouth.edu/~mansur/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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