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The inefficiency of private adaptation to pollution in the presence of endogeneous market structure

Author

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  • Klaus Eisenack

    (University of Oldenburg, Department of Economics)

Abstract
The paper considers an industry where production costs rise due to pollution, but where this effect can be partially off-set by investing in adaptation as a private good. The focus is not on external effects, but industries where economies of scale are introduced from adapting to pollution. The structure of the resulting oligopolistic market is endogenous, since the level of adaptation is chosen by the firms. The analysis of externalities usually disregards defensive or adaptation measures, with a few exceptions that point to considerable complications. The present debate on adaptation to climate change shows the importance of understanding defensive measures. I show that the market failure caused by economies of scale leads to production costs above the social optimum, i.e. to under-adapation. When pollution increases, adaptation only increases if demand is price inelastic. Otherwise, welfare loss from market failure decreases with pollution. The total welfare loss is only convex if demand is price inelastic and the influence of pollution on production costs is stronger than the influence of adaptation. Concave welfare loss has crucial implications for abatement policies. Copyright Springer Science+Business Media Dordrecht 2014
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Klaus Eisenack, 2010. "The inefficiency of private adaptation to pollution in the presence of endogeneous market structure," Working Papers V-328-10, University of Oldenburg, Department of Economics, revised Aug 2010.
    • Handle: RePEc:old:dpaper:328
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    File URL: http://www.vwl.uni-oldenburg.de/download/V-328-10.pdf
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    References listed on IDEAS

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    Cited by:

    1. Gawel, Erik & Lehmann, Paul & Strunz, Sebastian & Heuson, Clemens, 2016. "A public choice framework for climate adaptation: Barriers to efficient adaptation and lessons learned from German flood disasters," UFZ Discussion Papers 3/2016, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    2. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Ökonomische Grundfragen der Klimaanpassung: Umrisse eines neuen Forschungsprogramms," UFZ Reports 02/2012, Helmholtz Centre for Environmental Research (UFZ).
    3. Claudia Schwirplies & Andreas Ziegler, 2017. "Adaptation of future travel habits to climate change," Tourism Economics, , vol. 23(6), pages 1275-1295, September.
    4. Väinö Nurmi & Karoliina Pilli-Sihvola & Hilppa Gregow & Adriaan Perrels, 2019. "Overadaptation to Climate Change? The Case of the 2013 Finnish Electricity Market Act," Economics of Disasters and Climate Change, Springer, vol. 3(2), pages 161-190, July.
    5. Heuson, Clemens & Gawel, Erik & Gebhardt, Oliver & Hansjürgens, Bernd & Lehmann, Paul & Meyer, Volker & Schwarze, Reimund, 2012. "Fundamental questions on the economics of climate adaptation: Outlines of a new research programme," UFZ Reports 05/2012, Helmholtz Centre for Environmental Research (UFZ).

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    More about this item

    Keywords

    self-protection; climate change; oligopoly; welfare; damage;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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