Pareto-Improving Supply Subsidy in a Simple General Oligopoly Equilibrium Model with Pollution Permits.

Summary We introduce a pollution permits 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. Introducing a competitive emission permits market solves the pollution control problem but does not alleviate market distortions. We provide some conditions under which giving a supply subsidy to the oligopolists that is financed by a tax on the competitive agent is welfare increasing.