In the 1990s there was a great deal of interest in the study of the role of endogenous market
structure under oligopoly in the characterization of emission taxes. This interest was
instrumental in providing policy guidance on the design of emission taxes based on market
characteristics. However, the literature has been silent on offering policy recommendations
on the design of emission taxes under endogenous market structure in the presence of
new firm acquisitions. We build a model where new firms enter the market where some
are acquired by an incumbent multi-plant firm, altering the initial market structure. In
this framework, we characterize the second-best emission tax and examine the role of
the resulting market structure, in particular the role of acquiring more/fewer of the new
firms, in the optimal design of emission tax. We argue that, under certain conditions, the
acquisition of new firms may lead to higher taxation consistent with the Pigouvian rule
or even exceed marginal damages. Our contribution is at the intersection of emission tax
design and M &A (new firm acquisition) literature.
