Market Power Effects on Market Equilibrium in Ambient Permit Markets

C.A.E., Université Paul Cézanne, Aix-Marseille III
Topics in Economic Analysis & Policy 02/2007; 7(1). DOI: 10.2202/1935-1682.1433
Source: RePEc


This paper discusses market power effects in ambient permit markets. We consider a dominant firm in a position to exert market power in several markets. A first conclusion is that the distortion observed on manipulated markets spreads to other markets. We find that the manipulated prices could be lower than their competitive level if the dominant firm acts as a monopolist, and higher if it acts as a monopsonist. We show that the efficient outcome is not reached, except if the number of firms is the same as the number of markets whatever the initial endowment of permits. If not, the efficient outcome can be reached by means of initial endowments.

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    • "Uncertainty regarding future allowance prices can lead to violation of the independence property under two conditions: risk aversion on the part of regulated firms, and limits to transferability of allowances (transaction costs). The consequences are that firms with small initial allocations tend to over-invest in abatement technology in order to hedge against possible high future allowance prices, and firms with large initial allocations tend to under-invest in abatement technology in order to hedge against possible low future allowance prices (Badlursson and von dehr Schwartz (2007) demonstrates that if permits are defined in terms of air quality space at a number of different receptor points with a different market pertaining to each receptor point, then, even with one or more dominant firms, the final allocation of permits may be independent of the initial allocation if the number of firms equals the number of markets in the ambient permit system. "
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    ABSTRACT: We examine an implication of the “Coase Theorem” which has had an important impact both on environmental economics and on public policy in the environmental domain. Under certain conditions, the market equilibrium in a cap-and-trade system will be cost-effective and independent of the initial allocation of tradable rights. That is, the overall cost of achieving a given aggregate emission reduction will be minimized, and the final allocation of permits will be independent of the initial allocation. We call this the independence property. This property is very important because it allows equity and efficiency concerns to be separated in a relatively straightforward manner. In particular, the property means that the government can establish the overall pollution-reduction goal for a cap-and-trade system by setting the cap, and leave it up to the legislature – such as the U.S. Congress – to construct a constituency in support of the program by allocating the allowances to various interests without affecting either the environmental performance of the system or its aggregate social costs. Our primary objective in this paper is to examine the conditions under which the independence property is likely to hold – both in theory and in practice. A number of factors can call the independence property into question theoretically, including market power, transaction costs, non-cost-minimizing behavior, and conditional allowance allocations. We find that, in practice, there is support for the independence property in some, but not all cap-and-trade applications.
    Full-text · Article · Mar 2010 · SSRN Electronic Journal
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    ABSTRACT: This paper investigates if pollution permit markets are harmful for employment within a Wage Setting-Price Setting (WS-PS) model. The employment level is determined according to several financing unemployment benefits: a wage tax or the revenue of the pollution permit auction. We first show that a permit market weakens the union market power. Whatever the way that unemployment benefits are financed, the choice of the pollution cap is always neutral on the employment levels, and these latter always increase if the technology to reduce pollution become more efficient. Depending on the value of the wage tax, the employment level can be higher or lower when unemployment benefits are financed by pollution permits rather than a wage tax.
    Full-text · Article · Sep 2013 · Economic Modelling