On Coase and Hotelling, with an application to pollution markets

Speaker: Prof. Juan-Pablo Montero is at the Economics Department of the Ponti?cia Universidad Catolica de Chile, and a Research Associate at the MIT Center for Energy and Environmental Policy Research. In this seminar he will discuss recent work described in two papers: (1) On Coase and Hotelling; and (2) Market power in an exhaustible resource market: The case of storable pollution permits. (Montero's website)

Abstract 1: It has been long recognized that an exhaustible-resource monopsonist faces a commitment problem similar to that of a durable-good monopolist. Indeed, Hörner and Kamien (2004) demonstrate that the two problems are formally equivalent under full commitment. We show that there is no such equivalence in the absence of commitment. The existence of a choke price at which the monopsonist adopts the substitute (backstop) supply divides the surplus between the buyer and the sellers in a way that is unique to the resource model. Sellers receive a surplus share independently of their cost heterogeneity; a result in sharp contrast with the durable-good monopoly logic. The resource buyer can distort the equilibrium through delayed purchases, but the Coase conjecture arises under extreme patience (zero discount rate). (Full article)

Abstract 2: Motivated by the structure of existing pollution permit markets, we study the equilibrium path that results from allocating an initial stock of storable permits to a (or a few) large polluting agent and a competitive fringe. A large agent selling permits in the market exercises market power no di?erently than a large supplier of an exhaustible resource. However, whenever the large agent’s endowment falls short of its efficient endowment –allocation pro?le that would exactly cover its emissions along the perfectly competitive path– the market power problem disappears, much like in a durable-good monopoly. We illustrate our theory with two applications: the U.S. sulfur market and the global carbon market that may eventually develop beyond the Kyoto Protocol. (Full article)