Journal of Regulatory Economics

, Volume 44, Issue 1, pp 80–102 | Cite as

Prices versus quantities: environmental regulation and imperfect competition

  • Erin T. MansurEmail author
Original Article


By exercising market power, a firm will distort the production, and therefore the emissions decisions, of all firms in the market. This paper examines how the welfare implications of strategic behavior depend on how pollution is regulated. Under an emissions tax, aggregate emissions do not affect the marginal cost of polluting. In contrast, the price of tradable permits is endogenous. I show when this feedback effect increases strategic firms’ output. Relative to a tax, tradable permits may improve welfare in a market with imperfect competition. As an application, I model strategic and competitive behavior of wholesalers in a Mid-Atlantic electricity market. Simulations suggest that exercising market power decreased emissions locally, thereby substantially reducing the regional tradable permit price. Furthermore, I find that had regulators opted to use a tax instead of permits, the deadweight loss from imperfect competition would have been even greater.


Environmental regulation Market based instruments   Imperfect competition Electricity restructuring 

JEL Classification

H23 L11 L94 



I would like to thank Severin Borenstein, Jim Bushnell, Stephen Holland, Nat Keohane, Barry Nalebuff, Sheila Olmstead, Ben Polak, Chris Timmins, Frank Wolak, Catherine Wolfram and seminar participants at Berkeley, Yale, and NBER.


  1. Barrett, S. (1994). Strategic environmental policy and international trade. Journal of Public Economics, 54, 325–338.CrossRefGoogle Scholar
  2. Borenstein, S., Bushnell, J. B., & Wolak, F. A. (2002). Measuring market inefficiencies in California’s restructured wholesale electricity market. American Economic Review, 92, 1376–1405.CrossRefGoogle Scholar
  3. Buchanan, J. M. (1969). External diseconomies, corrective taxes, and market structure. American Economic Review, 59, 174–177.Google Scholar
  4. Bushnell, J. B., Mansur, E. T., & Saravia, C. (2008). Market structure and competition: A cross-market analysis of U.S. electricity deregulation. American Economic Review, 98, 237–266.CrossRefGoogle Scholar
  5. Chen, Y., & Hobbs, B. (2005). An oligopolistic power market model with tradable NOx permits. IEEE Transactions on Power Systems, 20, 119–129.CrossRefGoogle Scholar
  6. Chen, Y., Hobbs, B., Leyffer, S., & Munson, T. (2006). Solution of large-scale leader-follower market equilibria problems: Electric power and \(\text{ NO }_{x}\) permit markets. Computational Management Science, 3, 307–330.CrossRefGoogle Scholar
  7. Fevrier, P., & Linnemer, L. (2004). Idiosyncratic shocks in an asymmetric Cournot oligopoly. International Journal of Industrial Organization, 22, 835–848.CrossRefGoogle Scholar
  8. Goulder, L. H., Parry, I. W. H., Burtraw, D. (1997). Revenue-raising vs. other approaches to environmental protection: The critical significance of pre-existing tax distortions. RAND Journal of Economics, 28, 708–731.Google Scholar
  9. Hahn, R. W. (1984). Market power and transferable property rights. Quarterly Journal of Economics, 99, 753–765.CrossRefGoogle Scholar
  10. Holland, S. P., & Mansur, E. T. (2008). Is real-time pricing green? The environmental impacts of electricity demand variance. Review of Economics and Statistics, 90(3), 550–561.CrossRefGoogle Scholar
  11. Ireland, N. J. (1977). Ideal prices vs. prices vs. quantities. Review of Economic Studies, 44(1), 183–186.CrossRefGoogle Scholar
  12. Jaffe, A. B., Newell, R. G., & Stavins, R. N. (2002). Environmental policy and technological change. Environmental and Resource Economics, 22, 41–69.CrossRefGoogle Scholar
  13. Joskow, P., & Kahn, E. (2002). A quantitative analysis of pricing behavior in California’s wholesale electricity market during summer 2000. Energy Journal, 23, 1–35.Google Scholar
  14. Keohane, N. (2007). Cost savings from allowance trading in the 1990 clean air act: Estimates from a choice-based model. In J. Freeman & C. D. Kolstad (Eds.), Moving to markets in environmental regulation: Lessons from twenty years of experience (Chap. 8, pp. 194–229). Oxford: Oxford Press.Google Scholar
  15. Kolstad, J., & Wolak, F. (2003). Using environmental emissions permit prices to raise electricity prices: Evidence from the California electricity market. Center for the Study of Energy Markets Working Paper 113.Google Scholar
  16. Levin, D. (1985). Taxation within Cournot oligopoly. Journal of Public Economics, 27, 281–290.CrossRefGoogle Scholar
  17. Mansur, E. T. (2006). Note regarding endogenous emissions rates in prices vs. quantities. See
  18. Mansur, E. T. (2007a). Do oligopolists pollute less? Evidence from a restructured electricity market. Journal of Industrial Economics, 55, 661–689.CrossRefGoogle Scholar
  19. Mansur, E. T. (2007b). Upstream competition and vertical integration in electricity markets. Journal of Law and Economics, 50, 125–156.CrossRefGoogle Scholar
  20. Mansur, E. T. (2008). Measuring welfare in restructured electricity markets. Review of Economics and Statistics, 55, 369–386.CrossRefGoogle Scholar
  21. Misiolek, W. S., & Elder, H. W. (1989). Exclusionary manipulation of markets for pollution rights. Journal of Environmental Economics and Management, 16, 156–166.CrossRefGoogle Scholar
  22. Sartzetakis, E. S. (1997). Raising rivals’ costs strategies via emission permits markets. Review of Industrial Organization, 12, 751–765.CrossRefGoogle Scholar
  23. Shaffer, S. (1995). Optimal linear taxation of polluting oligopolists. Journal of Regulatory Economics, 7, 85–100.CrossRefGoogle Scholar
  24. Stavins, R. N. (1995). Transaction costs and tradable permits. Journal of Environmental Economics and Management, 29, 133–147.CrossRefGoogle Scholar
  25. Weisbach, D. (2011). Instrument choice is instrument design. In G. E. Metcalf (Ed.), U.S. energy tax policy. Cambridge: Cambridge University Press.Google Scholar
  26. Weitzman, M. L. (1974). Prices vs. quantities. Review of Economic Studies, 41, 477–491.CrossRefGoogle Scholar
  27. Wolfram, C. (1999). Measuring duopoly power in the British electricity spot market. American Economic Review, 89, 805–826.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Dartmouth College and NBERHanoverUSA

Personalised recommendations