Working Paper: NBER ID: w13511
Authors: Erin T. Mansur
Abstract: Electricity restructuring has created the opportunity for producers to exercise market power. Oligopolists increase price by distorting output decisions, causing cross-firm production inefficiencies. This study estimates the environmental implications of production inefficiencies attributed to market power in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and new environmental regulation took effect. I find that strategic firms reduced their emissions by approximately 20% relative to other firms and their own historic emissions. Next, I compare observed behavior with estimates of production, and therefore emissions, in a competitive market. According to a model of competitive behavior, changing costs explain approximately two-thirds of the observed pollution reductions. The remaining third can be attributed to firms exercising market power.
Keywords: Electricity Restructuring; Market Power; Environmental Regulation; Emissions Reduction
JEL Codes: H23; L13; L33; L94; Q53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Strategic firms (L10) | emissions reductions (Q52) |
| Market power (L11) | emissions reductions (Q52) |
| Oligopolistic behavior (D43) | emissions reductions (Q52) |
| Strategic behavior (C70) | emissions reductions (Q52) |
| Control groups (C92) | emissions reductions comparison (H23) |
| Changing costs (D24) | emissions reductions (Q52) |