We analyze the effect of mergers on optimal environmental taxation in a
Cournot oligopoly market with product differentiation. Our result indicates that the
adjustment in emission tax crucially depends on the post-merger output distortion and
pollution intensities. Specifically, we find that the optimal emission tax increases postmerger
as long as pollution intensity of firms is higher and output distortion smaller
post-merger than pre-merger. Furthermore, our result suggests that there is no need
to revise environmental policy in markets where pollution intensity of firms does not
change post-merger and (i) products are completely differentiated, or (ii) there are
many firms for any degree of product differentiation.
