Open AccessMarket Power in an Exhaustible Resource Market: The Case of Storable Pollution Permits *
Author(s) -
Liski Matti,
Montero JuanPablo
Publication year - 2011
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/j.1468-0297.2010.02366.x
Subject(s) - economics , market power , monopoly , microeconomics , endowment , resource (disambiguation) , industrial organization , market structure , computer network , philosophy , epistemology , computer science
Motivated by the structure of existing pollution permit markets, we study the equilibrium path that results from allocating an initial stock of storable permits to an agent, or a group of agents, in a position to exercise market power. A large seller of permits exercises market power no differently than a large supplier of an exhaustible resource. However, whenever the large agent's endowment falls short of his efficient endowment – allocation profile that would exactly cover his emissions along the perfectly competitive path – market power is greatly mitigated by a commitment problem, much like in a durable‐goods monopoly. We illustrate our theory with two applications: the US sulphur market and the international carbon market that may eventually develop beyond the Kyoto Protocol.