Working Paper: CEPR ID: DP955
Authors: Yannis Katsoulacos; Anastasios Xepapadeas
Abstract: Emission taxes under oligopoly with both fixed number and endogenous market structure (perhaps the most relevant market structures for policy issues) are examined. In the latter case, and contrary to what is expected under imperfect competition, the optimal tax could exceed marginal external damages, which implies that externalities generated by oligopolistic firms could be optimally controlled by over-internalizing environmental damages. Under endogenous market structure, a scheme consisting of a licence fee and a second-best under-internalizing emission tax can increase social welfare when compared with the use of a single emission tax exceeding marginal damages.
Keywords: externalities; pigouvian taxes; oligopoly; endogenous market structure
JEL Codes: D43; D62; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal emission tax (H21) | marginal external damages (D62) |
| Tax influences market entry (H25) | social welfare outcomes (I38) |
| Number of firms increases (D21) | optimal tax approaches marginal damages (H21) |
| Marginal abatement costs decrease (Q52) | likelihood of optimal tax being close to external marginal damage increases (H21) |
| Fixed costs decrease (D21) | likelihood of optimal tax being close to external marginal damage increases (H21) |