The Korean Economic Review
Environmental Regulations on Vertical Oligopolies with Eco-Industry
Sang-Ho Lee (Chonnam National University) and Chul-Hi Park (Chonnam National University)Year 2011Vol. 27No. 2
This article investigates optimal environmental regulations on vertical oligopolies where the upstream eco-industry produces abatement goods reducing pollutants and the downstream polluting industry produces consumption goods emitting pollutants. Under Cournot competition with blockaded entry, we analyze the environmental tax for externality and abatement subsidy for abatement activity. We also incorporate free entry case to examine the equilibrium number of firms in each industry, and then propose an entry fee for downstream polluting industry to lessen excessive entry and an entry subsidy for upstream eco-industry to increase insufficient entry when market concentration in eco-industry is significant. Finally, we show that under the two-part system with entry fee/subsidy and environmental tax/subsidy, the regulator can achieve the first-best market performance and fiscal equivalence with the Pigouvian rule.