Collusion Inducing Taxation of a Polluting Oligopoly

CentER Discussion Paper Series No. 2008-80

23 Pages Posted: 24 Sep 2008

See all articles by Hassan Benchekroun

Hassan Benchekroun

McGill University - Department of Economics

Amrita Ray Chaudhuri

University of Winnipeg - Department of Economics; Tilburg University - Tilburg University School of Economics and Management; Tilburg Law and Economics Center (TILEC)

Date Written: September 24, 2008

Abstract

We show that an environmental regulation such as a tax on pollution can act as a collusive device and induce stable cartelization in an oligopolistic polluting industry. We consider a dynamic game where pollution is allowed to accumulate into a stock over time and a cartel that includes all the firms in the industry. We show that a tax on pollution emissions can make it unprofitable for any firm to leave the cartel. Moreover the cartel formation can diminish the welfare gain from environmental regulation. We provide an example where social welfare under environmental regulation and collusion of firms is below social welfare under a laisser-faire policy.

Keywords: pollution tax, oligopoly, cartel formation, coalition formation, differential game

JEL Classification: H41, L51, Q58

Suggested Citation

Benchekroun, Hassan and Ray Chaudhuri, Amrita, Collusion Inducing Taxation of a Polluting Oligopoly (September 24, 2008). CentER Discussion Paper Series No. 2008-80, Available at SSRN: https://ssrn.com/abstract=1272905 or http://dx.doi.org/10.2139/ssrn.1272905

Hassan Benchekroun

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

Amrita Ray Chaudhuri (Contact Author)

University of Winnipeg - Department of Economics ( email )

Winnipeg, Manitoba R3B 2E9
Canada

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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