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Fees and the efficiency of tradable permit systems: an experimental approach

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  • Baldursson, Fridrik M.
  • Sturluson, Jon Thor

Abstract

The paper presents the results of an economic experiment in which the effects of fees on allocative efficiency of tradable utilization permits (e.g. pollution permits) are explored. Laboratory subjects (university students) play the roles of firms whose generic product requires a specific input or permits. Scarcity is exogenously introduced by a fixed supply of tradable production permits. Three treatments are compared: A) no fee imposed; B) a fixed tax per permit; C) partial retraction of permits which are reissued by auction. We regard B and C as two ways of imposing fees. Our results indicate that, after controlling for deviation of permit prices from a prediction based on fundamentals, fees have an impact on distribution of permits. Interestingly, a fixed tax enhances efficiency compared to the case of no fees, while retraction and reallocation by auction reduces efficiency compared to both alternative treatments. Apparently, subjects’ decision making is affected by the imposition of fees, but it matters how such costs are presented or framed.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14182.

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Date of creation: 2008
Date of revision: Mar 2009
Handle: RePEc:pra:mprapa:14182

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Keywords: Tradable permits; taxation; auctions; efficiency; experimental economics;

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