Competitive permit markets and vertical structures: the relevance of imperfectly competitive eco-industries

Corresponding publicationsWorking Paper | Competitive Permit Markets and Vertical Structures: The Relevance of Imperfect Competitive Eco-Industries. 2010. 〈halshs-00501831〉Permit markets lead polluting firms to purchase abatement goods from an eco-industry which is often concentrated. This paper studies the consequences of this sort of imperfectly competitive eco-industry on the equilibrium choices of the competitive polluting firms. It then characterizes the second-best pollution cap. By comparing this situation to one of perfect competition, we show that Cournot competition on the abatement good market contributes not only to a nonoptimal level of emission reduction but also to a higher permit price, which reduces the production level. These distortions increase with market power, measured by the margin taken by the noncompetitive firms, and suggest a second-best larger pollution cap