Environmental Policy and the Excess Entry Theorem

Abstract

This paper develops a model of Cournot oligopoly with pollution and free entry. We show that the deviation of the optimal emission tax rate from the marginal environmental damage depends crucially on the curvature of demand as well as the output elasticity of remission. Implementing the right environmental policy is therefore subject to an informational problem. We further show that under the traditional Pigouvian tax rule, the business- stealing effect is more likely to be observed than under the exogenously given tax rate. Hence, the Pigouvian tax is recommended from the informational viewpoint and it should be accompanied by entry regulation.