We develop an overlapping generations model of growth in which production generates polluting harmful emissions. In order to control pollution, the government implements an emission permits system. However, subject to political constraints, it is not able to assign the optimal quota on emissions. Hence, in such a framework, regulating pollution solely by permits does not allow the decentralized economy to achieve the long run social optimum. Our contribution is then to show that the combination of the existing permits system with a policy intended to promote a price discrimination between agents on the permits market, is a mean not only to circumvent these rigidities but also to restore the Pareto optimality of the equilibrium.
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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number
2006-21.
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