Pollution Abatement Under Oligopoly With Free-Entry: Theory And Evidence

Author

Luis Gautier, Southern Illinois University CarbondaleFollow

Date of Award

1-1-2009

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

LAHIRI,SAJAL

Abstract

This research examines the role of the abatement subsidy as a potential environmental policy option under various scenarios. This is achieved through a combination of theoretical and empirical analyses. The main motivation for this work stems from the existing literature on the abatement subsidy where its role seems to be a negative one from a policy standpoint. The reason for this is that in oligopoly models with free-entry the abatement subsidy encourages new firms into the market via higher profits thereby raising the level of total emissions in the industry, even though at the same time it lowers each firm's emissions. The overarching findings indicate that the abatement subsidy might play a role in environmental policy. The theoretical component of the work employs a symmetric free-entry Cournot oligopoly model both in a closed-economy and international settings. The key findings from these are that the subsidy lowers per-firm emissions and total industry emissions, and that the subsidy is welfare-enhancing when implemented multilaterally. As for the empirical component of the work, the analyses suggest that the subsidy is associated to lower per-firm emission levels and that the number of firms variable is not statistically significant.