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Environmental Regulation in Oligopoly Markets: A Study of Electricity Restructuring

52 Pages Posted: 2 Nov 2004  

Erin T. Mansur

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Date Written: September 2004

Abstract

In an oligopoly market subject to environmental regulation through tradable pollution permits, polluters' output decisions affect the price of polluting. With a pollution tax, this feedback effect is absent. In a permit regime, I show that the feedback effect increases strategic firms' production and improves welfare. I empirically test the environmental implications of oligopoly behavior in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and a tradable permit system took effect. Surprisingly, I show that 33-42 percent of the emissions reductions resulted from strategic behavior in the electricity market. Simulations suggest that welfare loss would have been seven percent greater under a tax than with tradable permits.

Keywords: Environmental regulation, tradeable permits, pollution tax, oligopoly, electricity

JEL Classification: H23, L11, L94

Suggested Citation

Mansur, Erin T., Environmental Regulation in Oligopoly Markets: A Study of Electricity Restructuring (September 2004). Yale SOM Working Paper No. ES-38. Available at SSRN: https://ssrn.com/abstract=601366

Erin T. Mansur (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603 646 2398 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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