Strategic Firm Interaction, Returns to Scale, Environmental Regulation and Ambient Charges in a Cournot Duopoly


Environmental regulation under conditions of imperfect competition in the presence of nonpoint sources (NPS) of pollution has not been well analyzed in the literature. This paper models strategic firm interaction and the effect of ambient charges on total NPS pollution in an imperfectly competitive, Cournot type duopoly under constant and decreasing returns to scale (CRTS & DRTS). We identify two distinct and often opposing effects. Under CRTS, the primary effect of a higher ambient charge is to increase pollution abatement (and thus decrease pollution) while the secondary effect is to lower output. Higher pollution abatement and lower output reinforce each other so that a higher ambient charge results in an unambiguous decrease in NPS pollution. Under DRTS, a higher ambient charge decreases output but the effect on abatement is ambiguous. Moreover, the marginal effect of a change in the ambient charge is larger under CRTS than DRTS. Our results indicate that, in general, pollution control mechanisms such as ambient charges tend to be more effective under CRTS.

Share and Cite:

S. Raju and S. Ganguli, "Strategic Firm Interaction, Returns to Scale, Environmental Regulation and Ambient Charges in a Cournot Duopoly," Technology and Investment, Vol. 4 No. 2, 2013, pp. 113-122. doi: 10.4236/ti.2013.42014.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] K. Loague and D. L.Corwin, “Point and Nonpoint Source Pollution,” John Wiley & Sons, Hoboken, 2005, pp. 1427-1439.
[2] J. Suter, C. Vossler, G. Poe and K. Segerson, “Experiments on Damage-Based Ambient Taxes for Nonpoint Source Polluters,” American Journal of Agricultural Economics, Vol. 90, No. 1, 2008, pp. 86-102. doi:10.1111/j.1467-8276.2007.01055.x
[3] G. Poe, W. Schulze, K. Segerson, J. Suter and C. Vossler, “Exploring the Performance of Ambient Based Policy Instruments when Nonpoint Source Polluters Can Cooper ate,” American Journal of Agricultural Economics, Vol. 86, No. 5, 2004, pp. 1203-1210. doi:10.1111/j.0002-9092.2004.00665.x
[4] K. Segerson, “Uncertainty and Incentives for Non-Point Pollution Control,” Journal of Environmental Economics and Management, Vol. 15, No. 1, 1988, pp. 87-98.
[5] A. P. Xepapadeas, “Environmental Policy under Imperfect Information: Incentives and Moral Hazard,” Journal of Environmental Economics and Management, Vol. 20, No. 2, 1991, pp. 113-126.
[6] A. P. Xepapadeas, “Environmental Policy Design and Dynamic Non-Point Source Pollution,” Journal of Environmental Economics and Management, Vol. 23, No. 1, 1992, pp. 22-39.
[7] A. P. Xepapadeas, “Observability and Choice of Instrument Mix in the Control of Externalities,” Journal of Public Economics, Vol. 56, No. 3, 1995, pp. 485-498.
[8] W. Baumol and W. Oates, “The Use of Standards and Prices for Protection of the Environment,” Swedish Journal of Economics, Vol. 73, No. 1, 1971, pp. 42-54. doi:10.2307/3439132
[9] W. Baumol, “On Taxation and the Control of Externalities,” American Economic Review, Vol. 62, No. 3, 1972, pp. 307-322.
[10] M. Weitzman, “Prices vs. Quantities,” Review of Economic Studies, Vol. 41, No. 4, 1994, pp. 477-491. doi:10.2307/2296698
[11] J. Harford, “Firm Behavior under Imperfectly Enforce able Pollution Standards and Taxes,” Journal of Environmental Economics and Management, Vol. 5, No. 1, 1978, pp. 26-43. doi:10.1016/0095-0696(78)90003-7
[12] M. Stimming, “Capital Accumulation Games under Environmental Regulation and Duopolistic Competition,” Journal of Economics, Vol. 69, No. 3, 1999, pp. 267-287. doi:10.1007/BF01231162
[13] T. Requate, “Pollution Control under Imperfect Competition: Asymmetric Bertrand Duopoly with Linear Technologies,” Journal of Institutional and Theoretical Economics, Vol. 149, No. 2, 1993, pp. 415-442.
[14] T. Requate, “Pollution Control in a Cournot Duopoly via Taxes or Permits,” Journal of Economics, Vol. 58, No. 3, 1993, pp. 255-291. doi:10.1007/BF01235250
[15] US Department of Commerce, “Pollution Abatement Costs and Expenditures (PACE): 2005,” US Department of Commerce, Economics and Statistics Administration, US Census Bureau, 2008.
[16] S. Ganguli and S. Raju, “Perverse Environmental Effects of Ambient Charges in a Bertrand Duopoly,” Journal of Environmental Economics and Policy, Vol. 1, No. 3, 2012, pp. 289-296.

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.