Emission taxes and market structure
Emission taxes (or effluent fees), along with emission controls and tradable permits, have emerged as one of the most important instruments for correcting environmental externalities. Emission taxes internalize the external damages associated with polluting activities. The internalization is complete when the fees equal the marginal external damages of pollution, such as in the case of Pigouvian taxes. It has been shown, however, that the socially optimal degree of internalization depends on the market structure. Under perfect competition, the desired internalization is complete (e.g., Baumol and Oates, 1988), while under imperfectly competitive conditions, optimal taxes deviate from external damages, as was first noted by Buchanan (1969) for the case of monopoly. Complete internalization of external damages created by a monopolist, will impose additional social cost by further restricting the already suboptimal output of the monopolist. In this case, the optimal effluent fee will be less than marginal external damages (Barnett, 1980; Misiolek, 1980).
KeywordsNash Equilibrium Market Structure Marginal Abatement Cost Free Entry Marginal Damage
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