TITLE:
Strategic Firm Interaction, Returns to Scale, Environmental Regulation and Ambient Charges in a Cournot Duopoly
AUTHORS:
Sudhakar Raju, Subhadra Ganguli
KEYWORDS:
Environmental Regulation; Nonpoint Source Pollution; Ambient Charges; Cournot Duopoly; Returns to Scale; Strategic Interaction
JOURNAL NAME:
Technology and Investment,
Vol.4 No.2,
May
24,
2013
ABSTRACT: Environmental regulation under conditions of
imperfect competition in the presence of nonpoint sources (NPS) of pollution
has not been well analyzed in the literature. This paper models strategic firm
interaction and the effect of ambient charges on total NPS pollution in an
imperfectly competitive, Cournot type duopoly under constant and decreasing
returns to scale (CRTS & DRTS). We identify two
distinct and often opposing effects. Under CRTS, the primary effect of a higher
ambient charge is to increase pollution abatement (and thus decrease pollution)
while the secondary effect is to lower output. Higher pollution abatement and
lower output reinforce each other so that a higher ambient charge results in an
unambiguous decrease in NPS pollution. Under DRTS, a higher ambient charge
decreases output but the effect on abatement is ambiguous. Moreover, the
marginal effect of a change in the ambient charge is larger under CRTS than
DRTS. Our results indicate that, in general, pollution control mechanisms such
as ambient charges tend to be more effective under CRTS.