Journal
INTERNATIONAL GAME THEORY REVIEW
Volume 14, Issue 4, Pages -Publisher
WORLD SCIENTIFIC PUBL CO PTE LTD
DOI: 10.1142/S0219198912400038
Keywords
Tradable emission permits; strategic interaction; regulation; grandfathering
Categories
Funding
- FCT [PTDC/EGE-ECO/115625/2009]
- Fundação para a Ciência e a Tecnologia [PTDC/EGE-ECO/115625/2009] Funding Source: FCT
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In this paper, we analyze environmental regulation based on tradable emission permits in the presence of strategic interaction in an output market with differentiated products. We characterize firms' equilibrium behavior in the permits and in the output market and we show that both firms adopt rival's cost-rising strategies. Then, we study the problem of the regulator that aims at maximizing social welfare, proposing an efficient criterion to allocate permits between firms. We find that the optimal allocation criterion requires a perfect balance between the difference on firms' price-cost margins in the permits market and the difference on firms' mark ups in the output market. In light of the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability.
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