Environmental and Resource Economics

, Volume 57, Issue 1, pp 81–99 | Cite as

The Inefficiency of Private Adaptation to Pollution in the Presence of Endogenous Market Structure

Article

Abstract

The paper considers an industry where production costs rise due to pollution, but where this effect can be partially off-set by investing in adaptation as a private good. The focus is not on external effects, but industries where economies of scale are introduced from adapting to pollution. The structure of the resulting oligopolistic market is endogenous, since the level of adaptation is chosen by the firms. The analysis of externalities usually disregards defensive or adaptation measures, with a few exceptions that point to considerable complications. The present debate on adaptation to climate change shows the importance of understanding defensive measures. I show that the market failure caused by economies of scale leads to production costs above the social optimum, i.e. to under-adapation. When pollution increases, adaptation only increases if demand is price inelastic. Otherwise, welfare loss from market failure decreases with pollution. The total welfare loss is only convex if demand is price inelastic and the influence of pollution on production costs is stronger than the influence of adaptation. Concave welfare loss has crucial implications for abatement policies.

Keywords

Climate change Damage Oligopoly Welfare  Self-protection  Non-convexity 

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Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  1. 1.Department of EconomicsCarl von Ossietzky University Oldenburg OldenburgGermany

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