| Abstract: | This paper studies the regulation of pollution emissions when one polluting firm is a monopolist in its output market and other polluting firms are competitive in their output markets. It is shown that an emissions permit system can generally support a second-best allocation when the monopolistic firm has market power in the emission permit market. The second-best permit regulation specifies a permit endowment for the monopolist such that the monopolist is a net supplier of permits in the equilibrium. Extensions to cases of multiple monopoly, monopsony, and oligopoly are discussed. |
