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Implementing the Efficient Allocation of Pollution

  • John Duggan
  • Joanne Roberts

We provide simple mechanisms to implement the efficient allocation of pollution, first assuming complete information across firms and then allowing for incomplete information. Both mechanisms operate by inducing firms to monitor one another, using firms' reports to determine pollution allotments and transfers. The complete information mechanism determines a firm's transfer according to a linear pollution price, set by other firms. Both mechanisms can be modified to be budget-balanced, in and out of equilibrium. The complete information mechanism implements the efficient allocation even when firms are allowed to use mixed strategies. Under a "single-crossing" condition, the same holds for the incomplete information mechanism.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/00028280260344614
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 4 (September)
Pages: 1070-1078

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:4:p:1070-1078
Note: DOI: 10.1257/00028280260344614
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