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The effects of rent seeking over tradable pollution permits

  • Hanley, Nicholas
  • Mackenzie, Ian A

The establishment of a tradable permit market requires the regulator to select a level of aggregate emissions and then distribute the associated permits (rent) to specific groups. In most circumstances, these decisions are often politically contentious and frequently influenced by rent seeking behaviour. In this paper, we use a contest model to analyse the effects of rent seeking effort when permits are freely distributed (grandfathered). Rent seeking behaviour can influence both the share of permits which an individual firm receives and also the total supply of permits. This latter impact depends on the responsiveness of the regulator to aggregate rent seeking effort. Using a three-stage game, we show that rent seeking can influence both the distribution of rents and the ex post value of these rents, whilst welfare usually decreases in the responsiveness of the regulator.

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Paper provided by University of Stirling, Division of Economics in its series Stirling Economics Discussion Papers with number 2009-12.

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Date of creation: May 2009
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Handle: RePEc:stl:stledp:2009-12
Contact details of provider: Postal: Division of Economics, University of Stirling, Stirling, Scotland FK9 4LA
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Web page: http://www.econ.stir.ac.uk/

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