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Permit Markets with Political and Market Distortions

Author

Listed:
  • Alex Dickson

    (University of Strathclyde)

  • Ian A. MacKenzie

    (University of Queensland)

Abstract

This article investigates cap-and-trade markets in the presence of both political and market distortions. We create a model where dominant firms have the ability to rent seek for a share of pollution permits as well as influence the market equilibrium with their choice of permit exchange because of market power. We derive the equilibrium and show the interaction of these two distortions has consequences for the resulting marginal inefficiency—the extent to which a re-allocation of permits between firms can reduce equilibrium abatement costs. We find that if the regulator is not very responsive to rent seeking then marginal inefficiency reduces relative to the case without rent seeking. When the regulator is very responsive to rent seeking, if dominant rent-seeking firms are all permit buyers (sellers) then marginal inefficiency reduces (increases) relative to the case without rent seeking.

Suggested Citation

  • Alex Dickson & Ian A. MacKenzie, 2022. "Permit Markets with Political and Market Distortions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 227-255, May.
  • Handle: RePEc:kap:enreec:v:82:y:2022:i:1:d:10.1007_s10640-022-00673-2
    DOI: 10.1007/s10640-022-00673-2
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    1. Friesen, Lana & MacKenzie, Ian A. & Nguyen, Mai Phuong, 2023. "Initially contestable property rights and Coase: Evidence from the lab," Journal of Environmental Economics and Management, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Pollution market; Market power; Rent seeking;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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