Do Oligopolists Pollute Less?

Evidence from a Restructured Electricity Market


Erin T. Mansur

Journal of Industrial Economics, Volume 55, Issue 4, December 2007, pages 661-689.
Working Paper, July 2007.
NBER Working Paper 13511, October 2007.
Related working paper: PWP-088




Electricity restructuring has created the opportunity for producers to exercise market power. Oligopolists increase price by distorting output decisions, causing cross-firm production inefficiencies. This study estimates the environmental implications of production inefficiencies attributed to market power in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and new environmental regulation took effect. I find that strategic firms reduced their emissions by approximately 20% relative to other firms and their own historic emissions. Next, I compare observed behavior with estimates of production, and therefore emissions, in a competitive market. According to a model of competitive behavior, changing costs explain approximately two-thirds of the observed pollution reductions. The remaining third can be attributed to firms exercising market power.



*  Environmental Regulation in Oligopoly Markets: A Study of Electricity Restructuring”
UC Energy Institute POWER Working Paper-088, November 2001, Revised September 2004.
SSRN Yale SOM Working Paper No. ES-38 (abstract number 601366), September 2004.
This paper has been split into two papers:
   “Prices vs. Quantities: Environmental Regulation and Imperfect Competition” and
   “Do Oligopolists Pollute Less? Evidence from a Restructured Electricity Market”