TY  - JOUR
AU  - Fullerton,Don
AU  - Metcalf,Gilbert E.
TI  - Cap and Trade Policies in the Presence of Monopoly and Distortionary Taxation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8901
PY  - 2002
Y2  - April 2002
UR  - http://www.nber.org/papers/w8901
L1  - http://www.nber.org/papers/w8901.pdf
N1  - Author contact info:
Don Fullerton
Department of Finance
University of Illinois
BIF Box#30 (MC520)
515 East Gregory Drive
Champaign, IL  61820
Tel: 217/244-3621
Fax: 217/244-3102
E-Mail: dfullert@illinois.edu

Gilbert E. Metcalf
Department of Economics
Tufts University
Medford, MA 02155
1500 Pennsylvania Ave., NW
Tel: 617/627-3685
Fax: 617/627-3917
E-Mail: gilbert.metcalf@tufts.edu
AB  - We extend an analytical general equilibrium model of environmental policy with pre-existing labor tax distortions to include pre-existing monopoly power as well.  We show that the existence of monopoly power has two offsetting effects on welfare. First, the environmental policy reduces monopoly profits, and the negative effect on income increases labor supply in a way that partially offsets the pre-existing labor supply distortion. Second, environmental policy raises prices, so interaction with the pre-existing monopoly distortion further exacerbates the labor supply distortion.  This second effect is larger, for reasonable parameter values, so the existence of monopoly reduces the welfare gain (or increases the loss) from environmental restrictions.
ER  -