Financial Structure and the Effectiveness of Pollution Control in an Oligopolistic Industry

Posted: 10 Sep 2001

See all articles by Richard Damania

Richard Damania

World Bank; University of Adelaide - School of Economics

Abstract

This paper explores the link between pollution taxes and the financial and output decisions of firms in an oligopolistic industry facing demand uncertainty. It is shown that environmental regulations such as pollution taxes may induce firms to alter their financial structure, which in turn influences both output levels and the effectiveness of the tax in controlling pollution emissions. It is demonstrated that there exist circumstances in which highly leveraged firms may respond to pollution taxes by expanding output and emission levels. This possibility arises in a leveraged oligopoly since the tax acts as a credible commitment device which leads to more aggressive competition in output markets.

Keywords: financial structure, debt, environmental control, pollution

JEL Classification: D43, G33, H00, Q2

Suggested Citation

Damania, Richard, Financial Structure and the Effectiveness of Pollution Control in an Oligopolistic Industry. Available at SSRN: https://ssrn.com/abstract=252793

Richard Damania (Contact Author)

World Bank ( email )

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University of Adelaide - School of Economics ( email )

Adelaide SA, 5005
Australia
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