EXTERNALITY, MARKET IMPERFECTION, AND OPTIMAL ENVIRONMENTAL POLICY
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This dissertation consists of three chapters. The first chapter studies the effects of emission taxation on an oligopolistic industry. It shows that, in the short run with a fixed number of firms, an increase in the tax rate always lowers all firms' outputs, resulting in a contraction of the industry output. In the long run, the tax affects firms' entry and exit decisions and may yield ambiguous effects on the firms' and industry outputs. It further shows that the tax reduces the equilibrium number of firms, and also reduces the equilibrium industry output if the inverse demand function is affine, concave, or not too convex. Finally, the chapter examines the question of the optimal number of firms from the social point of view. It shows excess or insufficient entry is determined by the relationship between the social marginal benefit of production and the responses of firms' outputs to a change in the tax rate.