Dynamic Environmental Policy with Strategic Firms: Prices Versus Quantities

Posted: 25 Jul 2007

See all articles by Amyaz A. Moledina

Amyaz A. Moledina

College of Wooster

Jay S. Coggins

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics

Stephen Polasky

University of Minnesota, Twin Cities - Department of Applied Economics

Christopher Costello

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management

Abstract

Environmental regulators often have imperfect information about regulated firms' abatement costs. In this paper we compare taxes and emissions permits in a dynamic setting in which firms behave strategically. The regulator updates policy over time based upon previous aggregate industry performance, assuming that firms are not strategic. We find that strategic firms facing an emissions tax have an incentive to overabate in order to obtain a lower tax in the future. Firms that trade emissions permits have a strategic incentive to reveal an artificially high permit price to obtain more permits in the future. Whether permits or taxes are preferred from a welfare standpoint depends upon how permit prices are determined. Taxes generate higher welfare when the low-cost firm sets the permit price but permits generate higher welfare when the high-cost firm sets the permit price.

Keywords: Environmental policy; Dynamics; Emissions taxes; Emissions permits

JEL Classification: Q32, H38

Suggested Citation

Moledina, Amyaz A. and Coggins, Jay S. and Polasky, Stephen and Costello, Christopher, Dynamic Environmental Policy with Strategic Firms: Prices Versus Quantities. Journal of Environmental Economics and Management, Vol. 45, No. 2, 2003. Available at SSRN: https://ssrn.com/abstract=1002653

Amyaz A. Moledina (Contact Author)

College of Wooster ( email )

Department of Economics, Morgan Hall
College of Wooster
Wooster, OH 44691
United States
(330) 263-2287 (Phone)

HOME PAGE: http://www.wooster.edu/economics/amoledina/

Jay S. Coggins

University of Minnesota - College of Agricultural, Food and Environmental Sciences - Department of Applied Economics ( email )

1994 Buford Avenue
St. Paul, MN 55108
United States
612-625-6232 (Phone)
612-625-2729 (Fax)

Stephen Polasky

University of Minnesota, Twin Cities - Department of Applied Economics ( email )

1994 Buford Avenue
St. Paul, MN 55108
United States
612-625-9213 (Phone)
612-625-2729 (Fax)

Christopher Costello

University of California, Santa Barbara (UCSB) - Donald Bren School of Environmental Science & Management ( email )

4670 Physical Sciences North
Santa Barbara, CA 93106-5131
United States
(805) 893-5802 (Phone)
(805) 893-7612 (Fax)

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