Abstract
This paper considers a market with an incumbent monopolistic firm and a potential entrant. Production by both firms causes polluting emissions. The government selects a tax per unit of emission to maximize social welfare. The size of the tax rate affects whether or not the potential entrant enters the market. We identify the conditions that create a market structure where the preferences of the government and the incumbent firm coincide. Interestingly, there are cases where both the government and incumbent firm prefer a monopoly. Hence, the government might induce profitable monopolization by using a socially optimal tax policy instrument.
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We thank Allard van der Made and two anonymous referees for their helpful suggestions. The usual disclaimer applies.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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Schoonbeek, L., de Vries, F.P. Environmental taxes and industry monopolization. J Regul Econ 36, 94–106 (2009). https://doi.org/10.1007/s11149-009-9093-4
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DOI: https://doi.org/10.1007/s11149-009-9093-4