IDEAS home Printed from
   My bibliography  Save this article

Adverse Selection, (Non-Tradable) Emission Permits and Optimal Price Differentiation


  • Mourad Afif
  • Sandrine Spaeter


In this paper, we focus on the adverse selection issue that prevails when the regulator is not able to observe the type of the abatement costs of the firms. The regulator decides the total level of emission that minimizes the expected social cost of pollution and she sells them to the firms. In an environment where firms can hide their type relative to their true abatement costs we consider a regulator who wants to maintain her first-best objective in terms of quantities: deviating from this objective is too costly for Society. A second important point of the model is that firms are compelled to participate in the environmental policy even if they loose some expected wealth in doing so: the participation constraint is no longer consistent with this setting. Second-best prices are distorted with respect to the types of the firms and they drive all the incentives for the firms to choose the contract (prices and quantities) that is built for each of them. An original result concerns the rent, which still benefits to high-cost types, but which appears to be a fee paid by low-cost types when firms have high elasticities of demand.

Suggested Citation

  • Mourad Afif & Sandrine Spaeter, 2011. "Adverse Selection, (Non-Tradable) Emission Permits and Optimal Price Differentiation," Annals of Economics and Statistics, GENES, issue 103-104, pages 93-106.
  • Handle: RePEc:adr:anecst:y:2011:i:103-104:p:93-106

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:adr:anecst:y:2011:i:103-104:p:93-106. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laurent Linnemer). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.