Stochastic Pollution, Permits, and Merger Incentives

摘要

Pollution permit regulation istroduce nonlinearlites into the objective function of a polluting firm. We develop a microeconomic model to show the effects these nonlinearities might have upon firm decisions when emissions are stochastic. Under perfect competition the fraction of planned pollution covered by permit management incentives may motivate a merer of otherwise independent firms. Incentives to petition for "bublble" coverage are also considered. The model is studied under risk neutrality and risk aversion. Imperfectly competitive situtation in the output and permit markets are also analyzed.