Trade with Polluting Nonrenewable Resources

The paper considers nonrenewable resource extraction in a situation where the resource buyers have formed a government which applies emission taxation for slowing pollution accumulation and the sellers are competitive or a resource cartel. The noncompetitive situation is studied as a Stackelberg differential game which the cartel leads. It is first assumed that extraction costs do not depend on the resource stock level and that the pollution stock does not decay. In the time-consistent and Markov-perfect equilibrium the sellersʹ monopoly power vanishes asymptotically. The sellersʹ market power reduces the buyersʹ emission tax at each point in time. In the Stackelberg equilibrium the emission tax is below the marginal present value of pollution damage. If pollution decays and extraction costs depend on the resource stock level, buyers have monopsony power and the ability of sellers to receive emission tax revenues is weakened. When the rate of pollution decay is high the producer price falls below the Pareto optimal level.