The Strategic Use of Abatement by a Polluting Monopoly

Abstract

This paper evaluates the e¤ects of the lack of regulatory commitment on emission tax applied by the regulator, abatement e¤ort made by the monopoly and social welfare comparing two alternative policy games. The …rst game assumes that the regulator commits to an ex-ante level of the emission tax. In the second one, in a …rst stage the regulator and the monopolist simultaneously choose the emission tax and abatement respectively, and in a second stage the monopolist selects the output level. We …nd that the lack of commitment leads to lower taxation and abatement that yield larger emissions and, consequently, a larger steady-state pollution stock. Moreover, the increase of environmental damages because of the increase in the pollution stock more than compensates the increase in consumer surplus and the decrease in abatement costs resulting in a reduction of social welfare. Thus, our analysis indicates that the lack of commitment has a negative impact of welfare although this detrimental e¤ect decreases with abatement costs.

Optimal Environmental Policy for a Polluting Monopoly with Abatement Costs: Taxes Versus Standards

“…Using the optimal strategy for emissions and the di¤erential equation (17), and taking into account the …rst Riccati equation for A r ; we obtain the steady-state pollution stock…”

“…Finally, we characterize the dynamics of the pollution stock. Substituting emissions given by (31) in the dynamics of the pollution stock de…ned by (17), we obtain the following di¤erential equation for the pollution stock…”