Abstract
We introduce a competitive pollution permit market in a two-sector oligopoly equilibrium model. In this model, one commodity is inelastically supplied by one competitive trader and another one is produced by a finite set of oligopolists, using the first commodity as an input. The production of the second commodity is a polluting activity. We study both the competitive and oligopoly equilibria. We provide some conditions under which a supply subsidy given to the oligopolists that is financed by a tax on the competitive agent is Pareto-improving.
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