Recent studies show that mergers among polluting firms could affect the regulatory landscape
of the industry and trigger a policy change. Using a two-country model, this study examines
the effect o f a merger size, a s measured by the number of merging firms, on the optimal
emission tax of another country. We show that, if pollution damages are not too large, a
decline in the size of a merger reduces production and profits in that country, which affords
a larger tax in the other country due to smaller profit-shifting c oncerns. On the other hand,
if pollution damages are extremely large, a reduction in the size of a merger in one country
reduces production in that country, but it also reduces production and emissions in the other
country. Thus, the latter can induce a smaller emission tax. The change in the emission tax
in both scenarios is consistent with cooperative outcomes.
