Show that in a symmetric oligopoly with free entry and firms’ technologies satisfying assumption 5.1 the first-best outcome can be achieved by an emission tax, a subsidy on output, and either an entry fee or a quota of auctioned licenses. Determine the optimal levels of those policy tools.

assumption 5.1

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Assumption 5.1 The cost function C(x,e) is twice continuously differentiable with C()>0, and for any production level x there is an emission level er such that C(x,e) = 0. Furthermore C.(x,e) <0 Ve