Production Externalities and Investment Caps: A Welfare Analysis Under Uncertainty

56 Pages Posted: 5 Mar 2019

See all articles by Luca Di Corato

Luca Di Corato

Ca Foscari University of Venice - Dipartimento di Economia

Yishay Maoz

The Open University of Israel - Department of Management and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2019

Abstract

In markets where production has adverse externalities, policy makers may wish to increase welfare by imposing a cap on market entries. In this paper, we examine the implications that the cap has on the firms’ investment equilibrium policy and on social welfare in the presence of market uncertainty. In contrast with previous literature, we explicitly model the present externality and then let the social planner choose the cap level maximizing welfare.

We find that:

i) if the consideration of the option value triggers investment at price above the social marginal cost of production, then it is optimal to have no cap at all;

ii) otherwise, the cap should be set on the current market quantity and a ban on further market entries should be announced.

Keywords: Investment, Uncertainty, Caps, Competition, Externalities, Welfare

JEL Classification: C61, D41, D62

Suggested Citation

Di Corato, Luca and Maoz, Yishay, Production Externalities and Investment Caps: A Welfare Analysis Under Uncertainty (February 27, 2019). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 7 (2019), Available at SSRN: https://ssrn.com/abstract=3346171 or http://dx.doi.org/10.2139/ssrn.3346171

Luca Di Corato (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Yishay Maoz

The Open University of Israel - Department of Management and Economics ( email )

1 University Road
Raanana, 43107
Israel
9727781891 (Phone)
97297780668 (Fax)

HOME PAGE: http://www.openu.ac.il/Personal_sites/Yishay-Maoz.html

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