Environmental Taxes and Industry Monopolization

Citation

Schoonbeek L & de Vries F (2008) Environmental Taxes and Industry Monopolization. Stirling Economics Discussion Paper, 2008-19.

Abstract
This paper considers a market with an incumbent monopolistic firm and a potential entrant. Production by both firms causes polluting emissions. The government selects a tax per unit emission by maximizing social welfare. The size of the tax rate affects whether or not the potential entrant enters the market. We identify the conditions that create a market structure where the preferences of the government and the incumbent firm coincide. Interestingly, there are cases where both the government and incumbent firm prefer a monopoly. Hence, the government might induce profitable monopolization by using a socially optimal tax policy instrument.

Keywords
taxes; market structure; environmental pollution; monopoly; Taxation Great Britain Environmental aspects; Environmental impact charges Great Britain; Pollution Economic aspects

JEL codes

• H23: Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
• L12: Monopoly; Monopolization Strategies
• Q58: Environmental Economics: Government Policy