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Permit markets with political and market distortions

Author

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  • Alex Dickson

    (Department of Economics, University of Strathclyde)

  • Ian A MacKenzie

    (School of Economics, University of Queensland, Brisbane, Australia, 4072.)

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 ellers then allocative efficiency reduces.

Suggested Citation

  • Alex Dickson & Ian A MacKenzie, 2020. "Permit markets with political and market distortions," Working Papers 2001, University of Strathclyde Business School, Department of Economics.
    • Handle: RePEc:str:wpaper:2001
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    References listed on IDEAS

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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:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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