Regulating Polluting Monopolies from an Equity-Efficiency Perspective

Abstract

Motivated by environmental justice concerns, we study the regulation of polluting monopolies from an equity-efficiency perspective. People vary by their level of consumption, emissions exposure, share of monopoly profit, and welfare weight. We characterize sufficient statistics equations for the optimal price and pollution tax, and show that their deviation from efficiency results can be attributed to two forces: the incidence of environmental harm and the distributional impact of a price or tax change. Applying our model to the residential electricity market, we find that the dominant equity consideration is the distributional incidence of producer and consumer surplus, resulting in an optimal price as much as 12.7% below the efficient one.