FEEM working papers "Note di lavoro"
Date: 30/8/2016

The Strategic Use of Abatement by a Polluting Monopoly

Guiomar Martín-Herrán (Department of Applied Economics, IMUVa - University of Valladolid); Santiago J. Rubio (Department of Economic Analysis, ERI-CES - University of Valencia)
JEL n.: H23, L12, L51, Q52, Q55
Keywords: Monopoly, Commitment, Emission Tax, Abatement, Stock Pollutant


This paper evaluates the effects of the lack of regulatory commitment on emission tax applied by the regulator, abatement effort made by the monopoly and social welfare comparing two alternative policy games. The first game assumes that the regulator commits to an ex-ante level of the emission tax. In the second one, in a first stage the regulator and the monopolist simultaneously choose the emission tax and abatement respectively, and in a second stage the monopolist selects the output level. We find that the lack of commitment leads to lower taxation and abatement that yield larger emissions and, consequently, a larger steady-state pollution stock. Moreover, the increase of environmental damages because of the increase in the pollution stock more than compensates the increase in consumer surplus and the decrease in abatement costs resulting in a reduction of social welfare. Thus, our analysis indicates that the lack of commitment has a negative impact of welfare although this detrimental effect decreases with abatement costs.


Suggested citation: Martín-Herrán, G., S. J. Rubio, (2016), 'The Strategic Use of Abatement by a Polluting Monopoly', Nota di Lavoro 58.2016, Milan, Italy: Fondazione Eni Enrico Mattei

Download file
Download file

FEEM Newsletter & Update

Subscribe to stay connected.

Your data will be processed by FEEM - Eni Enrico Mattei Foundation - Data Controller - to receive the Foundation's Newsletter & Update via e-mail. To send the requested information, the Data Controller uses e-mail sending service providers established in the U.S.A .: for this, your consent to the transfer of your email address to the U.S.A. is required, without which it will not be possible to comply with your request. We invite you to consult the complete information to obtain detailed information to protect your rights.