A Tradable Permit System in an Intertemporal Economy: A General Equilibrium Approach
AbstractThe creation of an artificial market through a tradable permit system as a remedy against market failure is gaining popularity among analysts and policymakers. We show that in an intertemporal competitive economy, a tradable permit system may not achieve efficiency without setting appropriate permit interest rates (rewards for holding permits), and to find them, we must know in advance the path of efficient permit prices, which is difficult or impossible to obtain. We deal with this problem in two ways. First, we seek a special case in which the permit interest rates are given by a simple rule. Second, we propose a mechanism by which the permit interest rates are generated endogenously. The determinacy of an equilibrium under a tradable permit system is also examined.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 658.
Date of creation: Aug 2008
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Auction; artificial market; tradable permit system; general equilibrium; permit interest rate; permit bank; indeterminacy;
Find related papers by JEL classification:
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-14 (All new papers)
- NEP-DGE-2008-08-14 (Dynamic General Equilibrium)
- NEP-ENE-2008-08-14 (Energy Economics)
- NEP-ENV-2008-08-14 (Environmental Economics)
- NEP-LAW-2008-08-14 (Law & Economics)
- NEP-REG-2008-08-14 (Regulation)
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