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Examining tradeable permits with market power, banking and non-compliance: a finite period model


  • Aparna Sawhney

    () (Associate Professor, Centre for International Trade and Development, Jawaharlal Nehru University)

  • Susmita Mitra

    () (Reaserch Scholar, Centre for International Trade and Development, Jawaharlal Nehru University)


Our model examines how co-existence of market power and noncompliance affects the efficiency and effectiveness of a cap-and-trade system with banking-borrowing in a finite period model. The dynamic equilibrium analysis here extends the results of the established literature, and we show that the initial allocation of permits to the dominant firm continues to play a significant role in both the cost-efficiency of abatement, as well as effectiveness of the cap-and-trade system. The presence of cheating, however, makes the permit demand of firms more price-elastic compared to a model with no cheating. Moreover, the second-order price sensitivity of the permit demand of the dominant firm plays a critical role in the compliance behavior of the dominant firm. We analyze the relationship between violation of a fringe firm and the dominant firm, illustrating the asymmetrical implications for when the dominant firm is a buyer of permits versus a seller of permits. Since we expect the regulator to reduce initial permit allocations over time, we also examine its impact on non-compliance behavior of the dominant firm.

Suggested Citation

  • Aparna Sawhney & Susmita Mitra, 2011. "Examining tradeable permits with market power, banking and non-compliance: a finite period model," Economics Bulletin, AccessEcon, vol. 31(2), pages 1265-1274.
  • Handle: RePEc:ebl:ecbull:eb-10-00660

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    More about this item


    Market power; price distortion; cap-and-trade emissions program; abatement efficiency; non-compliance;

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design


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