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Market power, private information, and the optimal scale of pollution permit markets with application to North Carolina's Neuse River

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  • Yates, Andrew J.
  • Doyle, Martin W.
  • Rigby, J.R.
  • Schnier, Kurt E.

Abstract

We extend the analysis of optimal scale in pollution permit markets by allowing for both market power and private information. We characterize the total costs (abatement costs and damages) under market power and private information and compare them to total costs under competition. It is possible for both market power and private information to lead to lower total costs than competition, but generally the differences between the three market structures will be small. We also conduct an optimal scale analysis of nitrogen pollution from waste water treatment plants (WWTP) into North Carolina's Neuse River System. An economic model of damages and abatement costs is integrated with a hydro-ecological model of nitrogen flow through the Neuse. We determine the optimal number of trading zones and allocate the WWTP into these zones. Under the most likely regulatory scenario, we find cost savings of 1.55 million dollars per year under the optimal market design relative to the typical 303(d) regulation in which the WWTP are not allowed to trade.

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Bibliographic Info

Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 35 (2013)
Issue (Month): 3 ()
Pages: 256-276

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Handle: RePEc:eee:resene:v:35:y:2013:i:3:p:256-276

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Web page: http://www.elsevier.com/locate/inca/505569

Related research

Keywords: Pollution permits; Market power; Water pollution; Optimal scale;

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References

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  1. R. Scott Farrow & Martin T. Schultz & Pinar Celikkol & George L. Van Houtven, 2005. "Pollution Trading in Water Quality Limited Areas: Use of Benefits Assessment and Cost-Effective Trading Ratios," Land Economics, University of Wisconsin Press, vol. 81(2).
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