An Experimental Study of Auctions Versus Grandfathering to Assign Pollution Permits
AbstractWe experimentally study auctions versus grandfathering in the initial assignment of pollution permits that can be traded in a secondary spot market. Low and high emitters compete for permits in the auction, whereas permits are assigned for free under grandfathering. In theory, trading in the spot market should erase inefficiencies due to initial mis-allocations. In the experiment, high emitters exercise market power in the spot market, and permit holdings under grandfathering remain skewed towards high emitters. Furthermore, the opportunity costs of "free" permits are fully "passed through." In the auction, the majority of permits are won by low emitters, reducing the need for spot-market trading. Auctions generate higher consumer surplus and slightly lower product prices in the laboratory markets. Moreover, auctions eliminate the large "windfall profits" that are observed in the treatment with free, grandfathered permit allocations. (JEL: C92, D43, D44, Q58) (c) 2010 by the European Economic Association.
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Bibliographic InfoArticle provided by MIT Press in its journal Journal of the European Economic Association.
Volume (Year): 8 (2010)
Issue (Month): 2-3 (04-05)
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Web page: http://www.mitpressjournals.org/jeea
Other versions of this item:
- Jacob K. Goeree & Charles A. Holt & Karen Palmer & William Shobe & Dallas Burtraw, 2009. "An experimental study of auctions versus grandfathering to assign pollution permits," IEW - Working Papers 429, Institute for Empirical Research in Economics - University of Zurich.
- Goeree, Jacob K. & Holt, Charles A. & Palmer, Karen & Shobe, William & Burtraw, Dallas, 2009. "An Experimental Study of Auctions Versus Grandfathering to Assign Pollution Permits," Discussion Papers dp-09-39, Resources For the Future.
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
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