Double Limit Pricing

Tinbergen Institute Discussion Paper 2015-136/VIII

55 Pages Posted: 20 Dec 2015

See all articles by Gerard van der Meijden

Gerard van der Meijden

Vrije Universiteit Amsterdam, School of Business and Economics

Karolina Ryszka

VU University Amsterdam

Cees Withagen

Free University of Amsterdam; Tilburg University

Date Written: December 18, 2015

Abstract

We study resource extraction by a non-renewable resource supplier who faces demand from two regions, one of which employs a tax on the imported resource and a subsidy on the available backstop technology, and one that has no environmental policy in place. The resource extraction path possibly contains two limit pricing phases, both in the presence and in the absence of speculators on the market. In the case with speculators, the resource price is continuous. Without speculators, the price jumps upward when demand from the region with climate policy drops to zero. A tightening of climate policies results in lower initial resource consumption; no Weak Green Paradox occurs. Yet, a decrease in the backstop production cost or an increase in the backstop subsidy shorten the overall extraction period, potentially resulting in higher total climate costs in the case without speculators. An analysis of the welfare effects reveals that the regulated region faces differential non-green and green incentives to tighten its climate policies in the two price regimes. We find that, even though climate damages might go down, unilateral policy tightening is possibly detrimental to the regulated region's non-green welfare due to a resource supply shift to the unregulated region.

Keywords: limit pricing, non-renewable resource, monopoly, climate change, carbon tax, renewables subsidy

JEL Classification: Q31, Q37

Suggested Citation

van der Meijden, Gerard and Ryszka, Karolina and Withagen, Cees A. M., Double Limit Pricing (December 18, 2015). Tinbergen Institute Discussion Paper 2015-136/VIII. Available at SSRN: https://ssrn.com/abstract=2705460 or http://dx.doi.org/10.2139/ssrn.2705460

Gerard Van der Meijden (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Karolina Ryszka

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Cees A. M. Withagen

Free University of Amsterdam ( email )

Tinbergen Institute De Boelelaan 1105
1081 HV Amsterdam
Netherlands

Tilburg University ( email )

Postbus 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
29
Abstract Views
413
PlumX Metrics