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Permit markets with political and market distortions

Author

Listed:
  • Alex Dickson

    (Department of Economics, University of Strathclyde, Glasgow, UK, G4 0QU.)

  • Ian A. MacKenzie

    () (School of Economics, University of Queensland
    http://www.uq.edu.au/economics/)

Abstract

This article investigates the cost effectiveness of 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 subgame-perfect equilibrium and show the interaction of these two distortions has consequences for the resulting allocative efficiency of the market. We find that if the dominant rent-seeking firms are all permit buyers (or a composition of buyers and sellers) then allocative efficiency is improved relative to the case without rent seeking; by contrast, if the dominant rent-seeking firms are all permit sellers then allocative efficiency reduces.

Suggested Citation

  • Alex Dickson & Ian A. MacKenzie, 2020. "Permit markets with political and market distortions," Discussion Papers Series 615, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:615
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    File URL: http://www.uq.edu.au/economics/abstract/615.pdf
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    More about this item

    Keywords

    Pollution market; Market power; rent seeking.;

    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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