Strategic Behavior and the Environment > Vol 3 > Issue 4

Possible Inefficiencies in a Duopoly Trading Emission Permits

Chaim Fershtman, The Eitan Berglas School of Economics, Tel Aviv University, Israel, , Aart de Zeeuw, Department of Economics, CentER and TSC, Tilburg University, the Netherlands,
Suggested Citation
Chaim Fershtman and Aart de Zeeuw (2013), "Possible Inefficiencies in a Duopoly Trading Emission Permits", Strategic Behavior and the Environment: Vol. 3: No. 4, pp 279-303.

Publication Date: 21 Aug 2013
© 2013 C. Fershtman and A. de Zeeuw
Environmental Economics,  Industrial Organization,  Public Economics,  Economic Theory,  Environmental politics,  Game theory,  Public policy,  Regulation,  Climate Change
DuopolyPollutionTradable permitsAbatement


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In this article:
1. Introduction 
2. The Model 
3. The Equilibrium Trade of Permits 
4. The Choice of Abatement and Emission Technologies 
5. Conclusion 


We consider a duopolistic industry in which pollution is a by-product of production and firms are given emission permits that they can trade. The common wisdom is that allowing for trade in emission permits promotes efficiency. We demonstrate that this common wisdom cannot automatically be extended to a duopolistic market structure. The main idea of this paper is that emission permits are used as a commitment device in order to manipulate the equilibrium of the goods market. In particular we show that allowing for permit trade may result in lower output and higher prices, and may shift production from the low to the high cost firm. In addition, it may induce the firms to choose an inferior abatement technology and a more polluting production technology.



Strategic Behavior and the Environment, Volume 4, Issue 4 10.1561/102.00000052