Weitzman Revisited: Emission Standards Versus Taxes with Uncertain Abatement Costs and Market Power of Polluting Firms

Abstract

External diseconomies of pollution, Cournot oligopoly, Cost uncertainty, D89, L13, Q58,

Second Best Environmental Policies under Uncertainty

“…Weitzman's results have been replicated and extended, among others, by and . and , after introducing several modes of market structures, generalize the original Weitzman rule, which, however, may be reversed in the presence of market power.…”

“…Third, the absence of consumption of the exporting good in the two exporting countries may affect the derived welfare implications. and re‐examine using closed economy models, Weitzman's question of “prices versus quantities” in second best environments. The authors claim that in such an environment taxes admit a greater advantage over standards.…”

Second Best Environmental Policies under Uncertainty

“…In order to detemine the expected welfare in the case of standards we substitute equilibrium values given in (9) in (4) and after taking the expectation and some algebraic simpli…cations we get: 7…”

“…Unless, the injuriousness of the pollutant is extremely high (i.e. k 2 ) then emission taxes can emerge as an equilibrium strategy 9 .…”

“…An implicit assumption of the aforementioned papers is that the market structure is perfectly competitive. This assumption, however, is not innocuous as illustrated by Heuson [9], [10]. In particular, applying the Weitzman rule in the optimal choice between taxes and standards in a closed economy under Cournot competition can be misleading since the use of taxes increases the total output and thus lowers the market price leading to higher welfare in contrast to the case of a standard.…”