Measuring the Effects of Environmental Regulation in Oligopolistic Markets with Differentiated Products
Pollution emissions from vehicles have increased considerably in recent years in many Brazilian cities, causing significant health problems. As a response, environmental standards for automobile pollution were implemented in 1988, and considerable reductions in emissions were attained. Nevertheless, in 1997 substantial differences in emissions between car models still remained, suggesting the need for further regulation. This paper simulates the effects of a new environmental standard on the automobile market. The results indicate that, given the existing technology, imposing a new standard of 0.15 grammes per kilometre for all automobiles would lead to an average price increase of 12% and a reduction in total sales of 31%. This would generate a 39% reduction in total HC emissions per kilometre driven, with a tax revenue loss of 16%. The paper concludes that, although substantial emissions reductions could be induced by a tighter standard, the welfare effects of such a policy requires further analysis.