Taxes versus standards under cross-ownership

This paper analyzes the effect of passive investment in rival firms on the setting of uniform taxes and uniform absolute emission standards by the government. When firms are equal and there is no cross-ownership, standards and taxes are equivalent and generate the same social welfare. However, under cross-ownership that result does not hold since cross-ownership reduces market competition, which has a different effect on taxes and standards. In general, we find that when cross-ownership is low social welfare is greater with a tax, and when it is high social welfare is greater with a standard.