Title: Market structure and the enforcement of emissions taxes
Authors: Linus Nyiwul; Ekundayo Shittu
Department of Economics and Africana Studies Program, Gettysburg College, 300 North Washington St., Gettysburg, PA 17325, USA
Department of Engineering Management and Systems Engineering, The George Washington University, 1776 G St. NW Ste 101, Washington, DC 20052, USA
Abstract: This paper presents a theoretical analysis of the nature of an optimal emissions tax when firms' emissions are not perfectly observable, specifically in two types of market structure: perfect competition and Cournot competition with and without free market entry. The purpose is to examine how the optimal tax is affected by enforcement costs and the market structure. We find that market imperfections and enforcement costs push the optimal tax lower than the marginal damage to society when the number of firms in the market is exogenous. However, when the number of firms is determined endogenously, enforcement costs generate two countervailing effects on the optimal tax. The direct effect is that higher marginal enforcement costs push the optimal tax lower. The indirect effect of enforcement costs results from the role of the tax as a deterrent to entry. Limiting entry and hence the resources expended on enforcement improves social welfare. Thus, the overall effect of enforcement costs on the optimal tax depends on the strength of direct relative to indirect effects of these costs when there is free entry and exit.
Keywords: emissions taxes; market structure; enforcement costs; GHG emissions; greenhouse gases; market imperfections; social welfare.
Interdisciplinary Environmental Review, 2013 Vol.14, No.3/4, pp.269 - 280
Submission date: 17 Apr 2013
Date of acceptance: 04 Oct 2013
Available online: 29 Jan 2014