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Tradeable permits, missing markets, and technology

This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the “optimal” number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy. Copyright Kluwer Academic Publishers 1994

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Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 4 (1994)
Issue (Month): 2 (April)
Pages: 171-186

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Handle: RePEc:kap:enreec:v:4:y:1994:i:2:p:171-186
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  1. Marin, Alan, 1991. "Firm incentives to promote technological change in pollution control: Comment," Journal of Environmental Economics and Management, Elsevier, vol. 21(3), pages 297-300, November.
  2. Scott E. Atkinson & T. H. Tietenberg, 1987. "Economic Implications of Emissions Trading Rules for Local and Regional Pollutants," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 370-86, May.
  3. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Noll, Roger G, 1982. "Implementing Marketable Emissions Permits," American Economic Review, American Economic Association, vol. 72(2), pages 120-24, May.
  5. Tietenberg, T H, 1990. "Economic Instruments for Environmental Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(1), pages 17-33, Spring.
  6. Atkinson, Scott E. & Tietenberg, T. H., 1982. "The empirical properties of two classes of designs for transferable discharge permit markets," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 101-121, June.
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  8. Robert E. Kohn, 1986. "The Rate of Emission and the Optimal Scale of the Polluting Firm," Canadian Journal of Economics, Canadian Economics Association, vol. 19(3), pages 574-81, August.
  9. Bartel, Ann P & Thomas, Lacy Glenn, 1987. "Predation through Regulation: The Wage and Profit Effects of the Occupational Safety and Health Administration and the Environmental Protection Agency," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 239-64, October.
  10. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
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  12. Keeler, Andrew G., 1991. "Noncompliant firms in transferable discharge permit markets: Some extensions," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 180-189, September.
  13. Charles D. Kolstad, 1986. "Empirical Properties of Economic Incentives and Command-and-Control Regulations for Air Pollution Control," Land Economics, University of Wisconsin Press, vol. 62(3), pages 250-268.
  14. Mendelsohn, Robert, 1986. "Regulating heterogeneous emissions," Journal of Environmental Economics and Management, Elsevier, vol. 13(4), pages 301-312, December.
  15. McGartland, Albert M. & Oates, Wallace E., 1985. "Marketable permits for the prevention of environmental deterioration," Journal of Environmental Economics and Management, Elsevier, vol. 12(3), pages 207-228, September.
  16. Malueg, David A., 1990. "Welfare consequences of emission credit trading programs," Journal of Environmental Economics and Management, Elsevier, vol. 18(1), pages 66-77, January.
  17. Dupont, Diane P., 1990. "Rent dissipation in restricted access fisheries," Journal of Environmental Economics and Management, Elsevier, vol. 19(1), pages 26-44, July.
  18. Krupnick, Alan J. & Oates, Wallace E. & Van De Verg, Eric, 1983. "On marketable air-pollution permits: The case for a system of pollution offsets," Journal of Environmental Economics and Management, Elsevier, vol. 10(3), pages 233-247, September.
  19. Atkinson, Scott & Tietenberg, Tom, 1991. "Market failure in incentive-based regulation: The case of emissions trading," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 17-31, July.
  20. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
  21. Thomas H. Tietenberg, 1980. "Transferable Discharge Permits and the Control of Stationary Source Air Pollution: A Survey and Synthesis," Land Economics, University of Wisconsin Press, vol. 56(4), pages 391-416.
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