Working Paper: NBER ID: w8901
Authors: Don Fullerton; Gilbert E. Metcalf
Abstract: We extend an analytical general equilibrium model of environmental policy with pre-existing labor tax distortions to include pre-existing monopoly power as well. We show that the existence of monopoly power has two offsetting effects on welfare. First, the environmental policy reduces monopoly profits, and the negative effect on income increases labor supply in a way that partially offsets the pre-existing labor supply distortion. Second, environmental policy raises prices, so interaction with the pre-existing monopoly distortion further exacerbates the labor supply distortion. This second effect is larger, for reasonable parameter values, so the existence of monopoly reduces the welfare gain (or increases the loss) from environmental restrictions.
Keywords: No keywords provided
JEL Codes: H2; Q2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| environmental policy (Q58) | reduction in monopoly profits (D42) |
| reduction in monopoly profits (D42) | increase in labor supply (J20) |
| environmental policy (Q58) | increase in labor supply (J20) |
| environmental policy (Q58) | increase in prices (E31) |
| increase in prices (E31) | decrease in real net wages (J39) |
| decrease in real net wages (J39) | exacerbation of labor supply distortion (J89) |
| increase in labor supply (J20) | partial offset of labor supply distortion (H31) |
| environmental policy (Q58) | exacerbation of labor supply distortion (J89) |