The Strategic Use of Abatement by a Polluting Monopoly

57 Pages Posted: 3 Sep 2016

See all articles by Guiomar Martin-Herran

Guiomar Martin-Herran

University of Valladolid - Faculty of Economic Science and Business Studies

Santiago J. Rubio

University of Valencia - Department of Economic Analysis

Date Written: September 2, 2016

Abstract

This paper evaluates the effects of the lack of regulatory commitment on emission tax applied by the regulator, abatement effort made by the monopoly and social welfare comparing two alternative policy games. The first game assumes that the regulator commits to an ex-ante level of the emission tax. In the second one, in a first stage the regulator and the monopolist simultaneously choose the emission tax and abatement respectively, and in a second stage the monopolist selects the output level. We find that the lack of commitment leads to lower taxation and abatement that yield larger emissions and, consequently, a larger steady-state pollution stock. Moreover, the increase of environmental damages because of the increase in the pollution stock more than compensates the increase in consumer surplus and the decrease in abatement costs resulting in a reduction of social welfare. Thus, our analysis indicates that the lack of commitment has a negative impact of welfare although this detrimental effect decreases with abatement costs.

Keywords: Monopoly, Commitment, Emission Tax, Abatement, Stock Pollutant

JEL Classification: H23, L12, L51, Q52, Q55

Suggested Citation

Martin-Herran, Guiomar and Rubio Jorge, Santiago J., The Strategic Use of Abatement by a Polluting Monopoly (September 2, 2016). FEEM Working Paper No. 58.2016. Available at SSRN: https://ssrn.com/abstract=2833791 or http://dx.doi.org/10.2139/ssrn.2833791

Guiomar Martin-Herran

University of Valladolid - Faculty of Economic Science and Business Studies ( email )

Avenida Valle Esgueva, 6
Valladolid
Spain

Santiago J. Rubio Jorge (Contact Author)

University of Valencia - Department of Economic Analysis ( email )

Avda. de los Naranjos s/n
46022 Valencia
Spain
+34963828219 (Phone)
+34963828249 (Fax)

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