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Abstract

Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). This paper proposes a simple mechanism that implements the first-best for any number of firms: a uniform price, sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which rapidly decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively. The mechanism also provides firms with incentives to invest in socially optimal R&D. (JEL D44, L51, Q21)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.1.496
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 496-518

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:496-518

Note: DOI: 10.1257/aer.98.1.496
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Find related papers by JEL classification:

• D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
• L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

References

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1. Groves, Theodore & Ledyard, John O, 1977. "Optimal Allocation of Public Goods: A Solution to the "Free Rider" Problem," Econometrica, Econometric Society, vol. 45(4), pages 783-809, May.
   
   • Theodore Groves & John Ledyard, 1976. "Optimal Allocation of Public Goods: A Solution to the 'Free Rider Problem'," Discussion Papers 144, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
2. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
   
   • Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
3. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 595-601, October.
4. McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
   
   • McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-99, June.
5. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation for Research in Economics, Yale University.
6. Wiggins, Steven N & Libecap, Gary D, 1985. "Oil Field Unitization: Contractual Failure in the Presence of Imperfect Information," American Economic Review, American Economic Association, vol. 75(3), pages 368-85, June.
7. Juan-Pablo Montero, 2004. "Pollution markets with imperfectly observed emissions," Working Papers 0414, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
   
   • Juan-Pablo Montero, 2005. "Pollution Markets with Imperfectly Observed Emissions," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 645-660, Autumn.
   • Montero, J-P., 2004. "Pollution Markets with Imperfectly Observed Emissions," Cambridge Working Papers in Economics 0456, Faculty of Economics, University of Cambridge.
8. Peter Cramton & Suzi Kerr, 2002. "Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Papers of Peter Cramton 02eptc, University of Maryland, Department of Economics - Peter Cramton, revised 06 May 2002.
   
   • Cramton, Peter & Kerr, Suzi, 2002. "Tradeable carbon permit auctions: How and why to auction not grandfather," Energy Policy, Elsevier, vol. 30(4), pages 333-345, March.
   • Kerr, Suzi & Cramton, Peter, 1998. "Tradable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Discussion Papers dp-98-34, Resources For the Future.
9. Tom Tietenberg, 2003. "The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 400-419.
10. Joanne Roberts, 1999. "Implementing the Efficient Allocation of Pollution," Working Papers jorob-99-01, University of Toronto, Department of Economics.
    
    • John Duggan & Joanne Roberts, 2002. "Implementing the Efficient Allocation of Pollution," American Economic Review, American Economic Association, vol. 92(4), pages 1070-1078, September.
11. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
12. Dasgupta, Partha & Hammond, Peter & Maskin, Eric, 1980. "On Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 47(5), pages 857-60, October.
13. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September.
14. Hal R. Varian, 1994. "A Solution to the Problem of Externalities when Agents are Well-Informed}," Microeconomics 9401003, EconWPA.
    
    • Varian, Hal R, 1994. "A Solution to the Problem of Externalities When Agents Are Well-Informed," American Economic Review, American Economic Association, vol. 84(5), pages 1278-93, December.
    • Varian, H,R., 1991. "A Solution to the Problem of Externalities when Agents are Well-Informed," Papers 10, Michigan - Center for Research on Economic & Social Theory.
15. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
16. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December.
17. Ilan Kremer & Kjell G. Nyborg, 2004. "Divisible-Good Auctions: The Role of Allocation Rules," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 147-159, Spring.
18. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March.

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Citations

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Cited by:

1. Enrique Calfucura & Jessica Coria & José Miguel Sánchez, 2008. "Permisos Transables de Emisión en Chile: Lecciones, Desafíos y Oportunidades para Países en Desarrollo," Documentos de Trabajo 347, Instituto de Economia. Pontificia Universidad Católica de Chile..
2. Juan-Pablo Montero, 2009. "Market Power in Pollution Permit Markets," Working Papers 0906, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
   
   • Juan Pablo Montero, 2009. "Market Power in Pollution Permit Markets," Documentos de Trabajo 355, Instituto de Economia. Pontificia Universidad Católica de Chile..
3. Juan-Pablo Montero, 2011. "Cuotas de Pesca y Libre Competencia: Algunas Reflexiones para la Nueva Ley de Pesca," Documentos de Trabajo 405, Instituto de Economia. Pontificia Universidad Católica de Chile..
4. Sonia Schwartz, 2009. "Comment distribuer les quotas de pollution ?. Une revue de la littérature," Revue d'économie politique, Dalloz, vol. 0(4), pages 535-568.
5. Hans Gersbach & Ralph Winkler, 2008. "International Emission Permit Markets with Refunding," CER-ETH Economics working paper series 08/97, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
   
   • Gersbach, Hans & Winkler, Ralph, 2011. "International emission permit markets with refunding," European Economic Review, Elsevier, vol. 55(6), pages 759-773, August.
   • Gersbach, Hans & Winkler, Ralph, 2008. "International Emission Permit Markets with Refunding," CEPR Discussion Papers 7035, C.E.P.R. Discussion Papers.
6. Thierry Brechet & Pierre M. Picard, 2008. "The Price of Silence: Markets for Noise Licenses and Airports," CREA Discussion Paper Series 08-08, Center for Research in Economic Analysis, University of Luxembourg.
   
   • Thierry Bréchet & Pierre M. Picard, 2010. "The Price Of Silence: Markets For Noise Licenses And Airports," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 1097-1125, November.
7. Suzi Kerr, 2012. "This paper provides a synthesis of the key conceptual insights from economics that can contribute to the design of effective, efficient, and fair international policy that creates incentives and stren," Working Papers 12_12, Motu Economic and Public Policy Research.
8. Juan Pablo Montero, 2007. "An Auction Mechanism for the Commons: Some Extensions," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 44(130), pages 141-150.

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