Cap and trade policies in the presence of monopoly and distortionary taxation
Author(s)Fullerton, Don.; Metcalf, Gilbert E.
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We extend an analytical general equilibrium model of environmental policy with pre-existing labor tax distortions to include pre-existing monopoly power as well. We show that the existence of monopoly power has two offsetting effects on welfare. First, the environmental policy reduces monopoly profits, and the negative effect on income increases labor supply in a way that partially offsets the pre-existing labor supply distortion. Second, environmental policy raises prices, so interaction with the pre-existing monopoly distortion further exacerbates the labor supply distortion. This second effect is larger, for reasonable parameter values, so the existence of monopoly reduces the welfare gain (or increases the loss) from environmental restrictions.
Abstract in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change Website. (http://mit.edu/globalchange/www/)Includes bibliographical references (p. 17-19).
MIT Joint Program on the Science and Policy of Global Change
Report no. 72