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Pollution Markets with Imperfectly Observed Emissions

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  • Montero, J-P.

Abstract

I study the advantages of pollution permit markets over traditional standard regulations when the regulator has incomplete information on firms’ emissions and costs of production and abatement (e.g., air pollution in large cities). Because the regulator only observes each firm’s abatement technology but neither its emissions nor its output, there are cases in which standards can lead to lower emissions and, hence, welfare dominate permits. If permits are optimally combined with standards, in many cases this hybrid policy converges to the permits-alone policy but (almost) never to the standards-alone policy.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0456.

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Length: 25
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:cam:camdae:0456

Note: CMI, IO
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Keywords: asymmetric information; imperfect monitoring; pollution markets; permits;

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References

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  1. Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2005. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521023894, April.
    • Ellerman,A. Denny & Joskow,Paul L. & Schmalensee,Richard & Montero,Juan-Pablo & Bailey,Elizabeth M., 2000. "Markets for Clean Air," Cambridge Books, Cambridge University Press, number 9780521660839, April.
  2. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  3. Juan-Pablo Montero & José Miguel Sánchez & Ricardo Katz, 2000. "A Market-Based Environmental Policy Experiment in Chile," Documentos de Trabajo 192, Instituto de Economia. Pontificia Universidad Católica de Chile..
  4. Cremer, Helmuth & Gahvari, Firouz, 2002. "Imperfect observability of emissions and second-best emission and output taxes," Journal of Public Economics, Elsevier, vol. 85(3), pages 385-407, September.
  5. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Stavins, Robert, 2001. "Experience with Market-Based Environmental Policy Instruments," Discussion Papers dp-01-58, Resources For the Future.
  7. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  8. Richard Schmalensee & Paul L. Joskow & A. Denny Ellerman & Juan Pablo Montero & Elizabeth M. Bailey, 1998. "An Interim Evaluation of Sulfur Dioxide Emissions Trading," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 53-68, Summer.
  9. 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.
  10. Don Fullerton & Sarah West, 1999. "Can Taxes on Cars and on Gasoline Mimic an Unavailable Tax on Emissions?," NBER Working Papers 7059, National Bureau of Economic Research, Inc.
  11. Roberton Williams, 2002. "Prices vs. Quantities vs. Tradable Quantities," NBER Working Papers 9283, National Bureau of Economic Research, Inc.
  12. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March.
  13. 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.
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Cited by:
  1. Juan-Pablo Montero, 2004. "Tradable permits with incomplete monitoring - Evidence from Santiago's particulate permits program," Working Papers 0415, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Matveenko, V., 2010. "Stimulating Mechanisms in Ecologically Motivated Regulation: Will Ecological Policies in Transition and Developing Countries Become Efficient?," Journal of the New Economic Association, New Economic Association, issue 8, pages 10-34.
  3. Shouyong Shi & Zhe Li, 2010. "Emission Tax or Standard: The Roles of Productivity Dispersion and Abatement," 2010 Meeting Papers 587, Society for Economic Dynamics.
  4. Juan-Pablo Montero, 2004. "Markets for environmental protection: design and performance incomplete enforcement," Estudios de Economia, University of Chile, Department of Economics, vol. 31(1 Year 20), pages 79-99, June.
  5. James Alm & H. Spencer Banzhaf, 2012. "Designing Economic Instruments For The Environment In A Decentralized Fiscal System," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 177-202, 04.
  6. Pasquale Scandizzo & Odin Knudsen, 2012. "Risk management and regulation compliance with tradable permits under dynamic uncertainty," European Journal of Law and Economics, Springer, vol. 33(1), pages 127-157, February.
  7. Christian Salas, 2010. "Evaluating Public Policies with High Frequency Data: Evidence for Driving Restrictions in Mexico City Revisited," Documentos de Trabajo 374, Instituto de Economia. Pontificia Universidad Católica de Chile..
  8. Tang, Erzi & Liu, Fengchao & Zhang, Jingjing & Yu, Jiao, 2014. "A model to analyze the environmental policy of resource reallocation and pollution control based on firms' heterogeneity," Resources Policy, Elsevier, vol. 39(C), pages 88-91.

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