Externality Control and Endogenous Market Structure under Uncertainty: the Price vs. Quantity Dilemma

44 Pages Posted: 7 Nov 2022

See all articles by Luca Di Corato

Luca Di Corato

Ca Foscari University of Venice - Dipartimento di Economia

Yishay Maoz

The Open University of Israel - Department of Management and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 22, 2022

Abstract

In a competitive industry where production entails a negative externality, a welfare-maximizing regulator considers, as control instruments, setting a cap on the industry output or levying an output tax. We embed this scenario within a dynamic setup where market demand is stochastic and market entry is irreversible. We firstly determine the industry equilibrium under each policy and then determine the cap level and the tax rate which maximize welfare in each case. We show that a first-best outcome can be achieved through the tax policy while the cap policy may only qualify as a second-best alternative.

Keywords: Investment, Uncertainty, Caps, Taxes, Competition, Externalities, Welfare

JEL Classification: C61, D41, D62

Suggested Citation

Di Corato, Luca and Maoz, Yishay, Externality Control and Endogenous Market Structure under Uncertainty: the Price vs. Quantity Dilemma (September 22, 2022). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 13/WP/2022, Available at SSRN: https://ssrn.com/abstract=4269109 or http://dx.doi.org/10.2139/ssrn.4269109

Luca Di Corato (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Yishay Maoz

The Open University of Israel - Department of Management and Economics ( email )

1 University Road
Raanana, 43107
Israel
9727781891 (Phone)
97297780668 (Fax)

HOME PAGE: http://www.openu.ac.il/Personal_sites/Yishay-Maoz.html

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