The effect of emission charges on output and emissions in dynamic Cournot duopoly

We consider the effect of emission charges on market structure, output, and emissions in Cournot competition. Assuming myopic decision making and a partial adjustment process, we analyze the impact of emission charges on the stability of duopoly/monopoly and on the level of emissions. We show that where marginal emission charges are increasing in the level of emissions, duopoly is stable. However, where marginal emission charges are decreasing in emissions, duopoly is unstable, and the system converges on monopoly. Equilibrium output and emissions are also shown to be higher under cost structures favoring monopoly than under cost structures favoring duopoly.