Environment, Natural Resources, and Advances in Industrial Organization – ENRAIO

Most societies now recognize that environmental policies, and natural resources management, have a major impact on their welfare. The public debates about such issues are both ubiquitous and controversial. By contrast, economists rely on a well-known corpus (the Pigovian approach to externalities, and the Hotelling-like analysis of resource management) which traces back to the first half of the last century. One may argue that the longevity of these approaches is a sign of their robustness, and there is no doubt that many public policies would benefit from a better understanding of their principles. Still these principles need to be refined in order to take into account additional dimensions such as uncertainty, imperfect competition, or hidden information. Our project proposes to expand the theory beyond the standard framework, so as to relax both the assumptions of perfect competition and complete information. The objective is to offer a series of contributions dealing in particular with the following questions. Firstly, under imperfect competition and hidden information prices play a new role by conveying information not only about production costs but also on the importance of the externality and/or the environmental quality of the product. When firms are privately informed on these features, one would like to know how prices are distorted away from their complete information levels and how optimal taxes are affected. Similarly, taxes may also be used by a government to convey information if the government is better informed than the consumer. The issue here is that, due to informational reasons, the optimal level of taxes may differ from marginal damages; this could explain why governments or agencies priorities seem to correspond only loosely to observed damages. Secondly, we propose to re-examine the impact of environmental policies when international trade under imperfect competition is taken into account. We argue below that we need to tackle more precisely the issues of asymmetries of either size or information between countries, and the resulting inefficiencies that emerge both at the international and at the domestic levels. Thirdly, the management of natural resources offers an important area of research. Two directions seem promising. The first one concerns the dynamic efficiency of this management when one takes into account the fact that at a point in time different generations co-exist; in a model with overlapping generations the inefficiency resulting from the egocentrism of a given generation might be alleviated by implicit contracts with the next generation. The second project concerns the optimal management of a non-renewable resource when the size of the reserves is privately known by the manager. Such a question has received increased attention when some petroleum firms had to admit that their announced reserves were somewhat over-estimated. Further research is needed on this topic. Overall our research project may be seen as an attempt to use the tools developed in game theory and industrial organization in the recent decades in order to renew the analysis of otherwise standard problems in environmental economics and natural resource management. We think that the issues of imperfect competition and incomplete information are essential to a modern understanding of these problems.